Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
_________________________
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ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2010
OR
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¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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88-0326480
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(State of Incorporation)
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(I.R.S. Employer Identification No.)
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|
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601 Cien Street, Suite 235, Kemah, TX
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77565-3077
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(Address of Principal Executive Offices)
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(ZIP Code)
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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 ¨ 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 ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No x
Item
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Description
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Page
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PART I - FINANCIAL INFORMATION
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ITEM 1.
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3
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ITEM 2.
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21
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ITEM 3.
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25
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ITEM 4.
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25
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PART II - OTHER INFORMATION
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ITEM 1.
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25
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ITEM 1A.
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25
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ITEM 2.
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25
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ITEM 3.
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25
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ITEM 4.
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26
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ITEM 5.
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26
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ITEM 6.
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26
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2
ITEM 1. FINANCIAL STATEMENTS
Consolidated Financial Statements
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4
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5
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6
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8
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3
Consolidated Balance Sheets
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(Unaudited)
September 30, 2010
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December 31, 2009
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|||||||
Assets
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||||||||
Current assets:
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||||||||
Cash and cash equivalents
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$
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1,865,439
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$
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1,692,340
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||||
Certificates of deposit
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1,093,430
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1,199,187
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||||||
Trading securities
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1,410,254
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1,490,472
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||||||
Accounts receivable, less allowance for doubtful accounts
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||||||||
of $245,752 and $244,121, respectively
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8,247,544
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2,769,837
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||||||
Current portion of notes receivable
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338,220
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1,173,334
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||||||
Accounts receivable from related parties
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10,494
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194,609
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||||||
Inventories
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5,374,082
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4,159,734
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||||||
Real estate held for sale
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6,755,680
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7,060,299
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Deposits for pipe inventory purchases
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-
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1,336,244
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Prepaid expenses and other current assets
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311,885
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230,748
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||||||
Assets held for sale | 1,233,207 | 836,389 | ||||||
Total current assets
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26,640,235
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22,143,193
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||||||
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Long-term notes receivable, less current portion
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385,338
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259,252
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Real estate held for sale | 225,000 | - | ||||||
Property and equipment, net of accumulated depreciation and amortization
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2,587,315
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3,227,549
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Goodwill
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674,539
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674,539
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Marketable securities - available for sale | 1,050,000 | - | ||||||
Other assets
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107,099
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106,403
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Assets held for sale | 4,244,374 | 4,601,233 | ||||||
Total assets
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$
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35,913,900
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$
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31,012,169
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||||
Liabilities and Equity
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||||||||
Current liabilities:
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Accounts payable and accrued expenses
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$
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6,729,924 |
$
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1,689,597
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||||
Short-term notes payable
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1,097,815
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1,381,908
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Accounts and notes payable to related parties
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137,500
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110,000
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Current installments of long-term debt
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4,919,060
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3,731,428
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Liabilities associated with assets held for sale | 2,983,308 | 2,088,809 | ||||||
Total current liabilities
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15,867,607
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9,001,742
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Long-term debt, less current installments
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866,743
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2,696,247
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Liabilities associated with assets held for sale | 4,495,259 | 4,653,319 | ||||||
Total liabilities
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21,229,609
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16,351,308
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Commitments and contingencies
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-
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-
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Equity:
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Preferred stock, $0.001 par value, 1,000,000 authorized; none issued
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-
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-
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Common stock, $0.001 par value, 50,000,000 authorized;
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10,449,325 and 9,191,325 shares issued, respectively
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10,124,069 and 8,871,369 shares outstanding, respectively
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10,450
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9,192
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Additional paid-in capital
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33,936,466
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33,571,064
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Accumulated deficit
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(19,625,086
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)
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(19,863,846
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)
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Accumulated other comprehensive loss | (320,000 | ) | - | |||||
Less treasury stock, at cost
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325,256 and 319,956 shares, respectively
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(510,948
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)
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(505,774
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)
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Total American International Industries, Inc. equity
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13,490,882
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13,210,636
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Noncontrolling interest
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1,193,409
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1,450,225
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Total equity
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14,684,291
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14,660,861
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Total liabilities and equity
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$
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35,913,900
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$
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31,012,169
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
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4
Consolidated Statements of Operations
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(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30, 2010
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September 30, 2009
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September 30, 2010
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September 30, 2009
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Revenues
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$ | 9,761,625 | $ |
6,274,509
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$ | 18,609,283 | $ |
14,707,321
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Costs and expenses:
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Cost of sales
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7,097,590 |
4,147,587
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12,768,321 |
8,937,055
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Selling, general and administrative
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2,295,043 |
2,967,961
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7,570,034 |
7,762,678
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Total operating expenses
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9,392,633 |
7,115,548
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20,338,355 |
16,699,733
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Operating income (loss)
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368,992 | (841,039 | ) | (1,729,072 | ) | (1,992,412 | ) | |||||||||
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Other income (expenses):
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Interest and dividend income
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23,824 |
82,904
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61,595 |
325,479
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Gain (loss) on sale of assets | (20,662 | ) | - | 760,542 | - | |||||||||||
Delta lawsuit settlement | - | - | 700,000 | - | ||||||||||||
Consulting service income | - | - | 1,370,000 | - | ||||||||||||
Realized gains (losses) on the sale of trading securities | (414,607 | ) | 191,740 | (96,293 | ) | (157,491 | ) | |||||||||
Unrealized gains on trading securities | 360,937 | 8,642 | 158,881 | 407,516 | ||||||||||||
Interest expense
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(113,764 | ) | (123,472 | ) | (342,721 | ) | (386,274 | ) | ||||||||
Other income
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4,168 |
7,187
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100,166 |
205,534
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Total other income (expense)
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(160,104 | ) |
167,001
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2,712,170 |
394,764
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Income (loss) before income tax
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208,888 |
(674,038
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) | 983,098 |
(1,597,648
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) | ||||||||||
Income tax expense
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1,124 | 8,857 | 51,354 | 26,008 | ||||||||||||
Income (loss) from continuing operations, net of income taxes
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207,764 |
(682,895
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) | 931,744 |
(1,623,656
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) | ||||||||||
Loss from discontinued operations - assets held for sale, net of income taxes | (375,058 | ) | (243,407 | ) | (1,103,630 | ) | (290,687 | ) | ||||||||
Loss from discontinued operations - assets sold, net of income taxes
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- |
-
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- | (350,000 | ) | |||||||||||
Net loss
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(167,294 | ) |
(926,302
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) | (171,886 | ) | (2,264,343 | ) | ||||||||
Net loss (income) attributable to the noncontrolling interest | (2,555 | ) | 14,660 | 410,646 | 307,314 | |||||||||||
Net income (loss) attributable to American International Industries, Inc. | $ | (169,849 | ) | $ | (911,642 | ) | $ | 238,760 | $ | (1,957,029 | ) | |||||
Net income (loss) per common share - basic and diluted: | ||||||||||||||||
Continuing operations | $ | 0.02 | $ | (0.07 | ) | $ | 0.13 | $ | (0.16 | ) | ||||||
Discontinued operations - assets held for sale | (0.04 | ) | (0.03 | ) | (0.11 | ) | (0.03 | ) | ||||||||
Discontinued operations - assets sold | (0.00 | ) | (0.00 | ) | (0.00 | ) | (0.04 | ) | ||||||||
Total
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$ | (0.02 | ) | $ | (0.10 | ) | $ | 0.02 | $ | (0.23 | ) | |||||
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Weighted average common shares - basic and diluted
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10,080,504 |
8,763,043
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9,780,898 |
8,661,263
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Comprehensive loss | ||||||||||||||||
Net loss | $ | (167,294 | ) | $ | (926,302 | ) | $ | (171,886 | ) | $ | (2,264,343 | ) | ||||
Unrealized loss on marketable securities | (500,000 | ) | - | (320,000 | ) | - | ||||||||||
Total comprehensive loss | (667,294 | ) | (926,302 | ) | (491,886 | ) | (2,264,343 | ) | ||||||||
Comprehensive loss (income) attributable to the noncontrolling interest | (2,555 | ) | 14,660 | 410,646 | 307,314 | |||||||||||
Comprehensive loss attributable to American International Industries, Inc. | $ | (669,849 | ) | $ | (911,642 | ) | $ | (81,240 | ) | $ | (1,957,029 | ) | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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5
Consolidated Statements of Cash Flows
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(Unaudited)
Nine Months Ended September 30,
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2010
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2009
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Cash flows from operating activities:
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Net loss
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$
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(171,886
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)
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$
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(2,264,343
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)
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Loss from discontinued operations - assets held for sale, net of income taxes | (1,103,630 | ) | (290,687 | ) | ||||
Loss from discontinued operations - assets sold, net of income taxes | - | (350,000 | ) | |||||
Net income (loss) from continuing operations | 931,744 | (1,623,656 | ) | |||||
Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities from continuing operations:
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Depreciation and amortization
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349,273
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396,343
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Share-based compensation
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1,174,803
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436,430
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Shares received for consulting services | (1,370,000 | ) | - | |||||
Gain on sale of assets | (760,542 | ) | - | |||||
Realized (gains) losses on the sale of trading securities
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(158,881
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)
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157,491
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Unrealized (gains) losses on trading securities
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96,293
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(407,516
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)
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Change in operating assets and liabilities:
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Accounts receivable
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(5,484,690
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) |
(1,901,307
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) | ||||
Trading securities
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142,806 |
300,840
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Inventories
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121,896
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(25,021
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)
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Prepaid expenses and other current assets
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(81,137
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(69,923
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) | ||||
Other assets
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(696
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) |
36,000
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Accounts payable and accrued expenses
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4,220,883
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1,558,175
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Net cash used in operating activities from continuing operations
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(818,248
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) |
(1,142,144
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) | ||||
Cash flows from investing activities from continuing operations:
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Proceeds from sale of equity investment | 20,000 | - | ||||||
Proceeds from sale of real estate held for sale | 943,500 | - | ||||||
Proceeds from sale of property and equipment | 340,445 | - | ||||||
Purchase of property and equipment
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(131,777
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)
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(155,873
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)
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Purchase of real estate held for resale | (29,557 | ) | - | |||||
Redemption of certificate of deposit
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625,000
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4,000,000
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||||||
Investment in certificate of deposit
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(519,243
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)
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(2,450,000
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)
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Purchase of note receivable from bank
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-
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(300,000
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)
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|||||
Proceeds from notes receivable
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26,963
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116,446
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Loans from related parties
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17,006
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168,606
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Net cash provided by investing activities from continuing operations
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1,292,337
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1,379,179
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Cash flows from financing activities from continuing operations:
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||||||||
Proceeds from issuance of common stock
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1,015,200
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-
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||||||
Proceeds from issuance of common stock of subsidiary | 22,100 | - | ||||||
Net borrowings under lines of credit agreements and short-term notes
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541,620
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836,800
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|||||
Proceeds from issuance of debt | 250,753 | 283,851 | ||||||
Principal payments on debt
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(1,718,337
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)
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(1,769,763
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)
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Payments for acquisition of treasury stock
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(5,174
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)
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(225,332
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)
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||||
Net cash provided by (used in) financing activities from continuing operations
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106,162
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(874,444
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)
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|||||
Net increase (decrease) in cash and cash equivalents from continuing operations
|
|
580,251
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(637,409
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)
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6
Nine Months Ended September 30,
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2010
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2009
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Discontinued operations: | ||||||||
Net cash used in operations | $ | (377,947 | ) | $ | (28,219 | ) | ||
Net cash provided by (used in) investing activities | (10,386 | ) | 67,453 | |||||
Net cash used in financing activities | (18,819 | ) | (464,234 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 173,099 | (1,062,409 | ) | |||||
Cash and cash equivalents at beginning of period
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1,692,340
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2,971,143
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||||||
Cash and cash equivalents at end of period
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$ |
1,865,439
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$ |
1,908,734
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Supplemental schedule of cash flow information: | ||||||||
Interest paid | $ | 628,262 | $ | 706,212 | ||||
Taxes paid | $ | 47,478 | $ | - | ||||
Non-cash transactions:
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Note receivable issued for common stock of DCP | $ | 55,000 | $ | - | ||||
Unrealized loss on available for sale securities | $ | 320,000 | $ | - | ||||
Acquisition of fixed assets under capital lease obligations | $ | 144,000 | $ | - | ||||
Real property received in foreclosure on note receivable | $ | 66,304 | $ | 198,500 | ||||
Trading securities received in foreclosure on note receivable | $ | - | $ | 40,000 | ||||
Receipt of common stock to convert promissory note due from Delta
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$
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872,352 |
$
|
- | ||||
Accounts payable and dividends payable assumed in Delta reverse merger transaction | $ | 597,131 | $ | - | ||||
Adjustment to noncontrolling interest in Delta, DCP, and BOG | $ | 295,279 | $ | - | ||||
Delta dividends declared and unpaid
|
$
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180,000 |
$
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- | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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7
American International Industries, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements of American International Industries, Inc. (“American”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in American's latest Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.
Organization, Ownership and Business
American, a Nevada corporation, operates as a diversified holding company with a number of wholly-owned subsidiaries and some partially owned subsidiaries. American is a diversified corporation with interests in industrial/commercial companies and an oil and gas service business. American's business strategy is to acquire controlling equity interests in businesses that it considers undervalued. American's management takes an active role in providing its subsidiaries with access to capital, leveraging synergies and providing management expertise in order to improve its subsidiaries' growth.
The consolidated financial statements include the accounts of American International Industries, Inc. ("American") and its wholly-owned subsidiary, Northeastern Plastics, Inc. ("NPI") and Delta Seaboard International, Inc. ("Delta"), in which American holds a 48.1% shareholder interest, Brenham Oil & Gas Corp. (“BOG”), in which American holds a 54.7% interest, and Downhole Completion Products, Inc. (“DCP”), in which American holds an 80% shareholder interest. All significant intercompany transactions and balances have been eliminated in consolidation.
During the three months ended September 30, 2010, American began activities to sell the assets and associated liabilities of its wholly-owned subsidiary, Shumate Energy Technologies, Inc. ("SET"), which are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheets as of December 31, 2009 and September 30, 2010 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20). SET's losses are included in Discontinued operations - assets held for sale, net of income taxes in the consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009 and in the consolidated statement of cash flows for the nine months ended September 30, 2010 and 2009. Negotiations for the sale of these assets and associated liabilities are at various stages with prospective buyers. Management believes that the book value of SET's assets and associated liabilities represents the fair value of the business and does not anticipate any losses as a result of the sale.
On February 3, 2010, Hammonds Industries Inc. ("Hammonds") and Delta Seaboard Well Service, Inc. ("Delta Seaboard"), a Texas corporation, completed a reverse merger ("Reverse Merger"). In connection with the reverse merger, Hammonds changed its name to Delta Seaboard International, Inc. and effected a one-for-ten (1:10) reverse stock split ("Reverse Split") of its common stock. Following the effective date of the Reverse Split, Delta issued shares of common stock to the existing stockholders of Delta Seaboard as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta Seaboard, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,353 in principal and accrued interest of debt payable by Delta to American; (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., a newly appointed director of Delta as well as Delta Seaboard’s president and a director of American and Ron Burleigh, a newly-appointed director of Delta as well as Delta Seaboard’s vice president, in consideration for their 49% equity ownership of Delta Seaboard; and (iii) 9,607,843 post-Reverse Split shares in consideration for Messrs. Derrick and Burleigh extending their employment agreements for five years in addition to the balance of their current employment agreements. Following the Reverse Split and Reverse Merger, American owns 32,859,935 shares of common stock, representing 48.1% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 30,924,353 shares of common stock, representing 45.2% of Delta's total outstanding shares. All other stockholders of Delta own 4,557,962 shares of common stock, representing 6.7% of Delta's total 68,342,250 outstanding shares. As part of the Reverse Merger, Delta assumed $709,552 in liabilities from Hammonds, including $615,000 in preferred dividends payable in shares of Delta's common stock.
8
Currently, corporate overhead includes BOG, a division that owns an oil, gas and mineral royalty interest in Washington County, Texas. Through BOG, the Company is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves. The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa. In April 2010, American entered into a Separation and Distribution Agreement to spin off Brenham Oil & Gas, Inc., which was 100% owned by American. In conjunction with this transaction, American formed Brenham Oil & Gas, Corp. with authorized common stock of 200,000,000 shares and authorized preferred stock of 10,000,000 shares. BOG issued 64,977,093 shares of common stock to American for all shares of Brenham Oil & Gas, Inc., of which American issued as a dividend 10,297,019 shares to the existing stockholders of American. From April 2010 through September 2010, Brenham issued 13,000,000 shares of common stock for cash consideration of $22,100 and 21,500,000 shares for services valued at $44,443. American maintains control of Brenham through ownership of 54,680,074 shares of Brenham's common stock, representing about 55% of the outstanding shares as of September 30, 2010.
On September 21, 2010, American prepared a registration statement on Form S-1 in order to register the BOG shares being distributed to American’s shareholders. Assuming the effectiveness of the registration statement, these shareholders will have registered free-trading shares. BOG will then be a separate reporting company, and we plan to take action in the future to quote BOG's common stock on the Over-The-Counter Bulletin Board.
On June 23, 2010, Joe Hoover, President of DCP, purchased 20% of the 1,000 shares of Common Stock of DCP held by American for $20,000 in cash and a $55,000 promissory note. American recorded a $74,814 gain on sale of assets for this transaction.
Reclassifications
Certain reclassifications have been made to amounts in prior periods to conform with the current period presentation. All reclassifications have been applied consistently to the periods presented.
Revenue Recognition
Revenue is recognized when the earning process is completed, the risks and rewards of ownership have transferred to the customer, which is generally the same day as delivery or shipment of the product, the price to the buyer is fixed or determinable, and collection is reasonably assured. Delta receives purchase orders for all of its service work and related pipe sales. All sales are recorded when the work is completed or when the pipe is sold. NPI has purchase orders for all sales, of which many of the items are requested to be container shipped and shipped directly to the end users. All sales are recorded when the inventory items are shipped. Taxes assessed by a governmental authority that are incurred as a result of a revenue transaction are not included in revenues. American has no significant sales returns or allowances.
Net Income (Loss) Per Share
The basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares outstanding during a period. Diluted net income (loss) per common share is computed by dividing the net income (loss), adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the three and nine months ended September 30, 2010 and 2009, potential dilutive securities that had an anti-dilutive effect were not included in the calculation of diluted net income (loss) per common share. These securities include options to purchase shares of common stock that were not "in the money".
Management's Estimates and Assumptions
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from these estimates.
Fair Value of Financial Instruments
Effective January 1, 2008, American adopted the framework for measuring fair value that establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Basis of Fair Value Measurement
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
9
Level 2 Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Unobservable inputs reflecting American's own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
American believes that the fair value of its financial instruments comprising cash, accounts receivable, notes receivable, accounts payable, and notes payable approximate their carrying amounts. The interest rates payable by American on its notes payable approximate market rates. The fair values of American's Level 1 financial assets, trading securities and marketable securities - available for sale that primarily include shares of common stock in various companies, are based on quoted market prices of the identical underlying security. As of September 30, 2010, American did not have any significant Level 2 or 3 financial assets or liabilities. The following table provides fair value measurement information for American's trading securities and marketable securities - available for sale:
As of September 30, 2010
|
||||||||||||||||||||
Fair Value Measurements Using:
|
||||||||||||||||||||
Carrying
Amount
|
Total
Fair Value
|
Quoted Prices
in Active Markets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
||||||||||||||||
Financial Assets:
|
||||||||||||||||||||
Trading Securities
|
$
|
1,410,254
|
$
|
1,410,254
|
$
|
1,410,254
|
$
|
-
|
$
|
-
|
||||||||||
Marketable Securities - available for sale | $ | 1,050,000 | $ | 1,050,000 | $ | 1,050,000 | $ | - | $ | - |
Subsequent Events
American has evaluated all transactions through the financial statement issuance date for subsequent event disclosure consideration.
There were various accounting standards and interpretations issued recently, none of which are expected to have a material impact on our consolidated financial position, operations or cash flows.
Note 2 - Trading Securities and Marketable Securities - Available for Sale
Investments in equity securities primarily include shares of common stock in various companies that are bought and held principally for the purpose of selling them in the near term with the objective of generating profits on short-term differences in price. These investments are classified as trading securities and, accordingly, any unrealized changes in market values are recognized in the consolidated statements of operations. For the three months ended September 30, 2010 and 2009, American had unrealized trading gains of $360,937 and $8,642, respectively, related to securities held on those dates. American recorded realized losses of $414,607 and realized gains of $191,740 for the three months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, American had unrealized trading gains of $158,881 and $407,516, respectively, related to securities held on those dates. American recorded realized losses of $96,293 and $157,491 for the nine months ended September 30, 2010 and 2009, respectively.
On June 21, 2010, American received as compensation for consulting services 1,000,000 restricted shares of ADB International Group, Inc. ("ADBI") common stock valued at $1,370,000, based on the closing market price of $1.37 per share on that date. This investment is classified as marketable securities - available for sale and, accordingly, any unrealized changes in market values are recognized as other comprehensive income in the consolidated statements of operations. At September 30, 2010, this investment was valued at $1,050,000, based on the closing market price of $1.05 per share on that date. American recognized other comprehensive loss for the three and nine months ended September 30, 2010 of $500,000 and $320,000, respectively, for the unrealized loss on this investment.
Equity markets can experience significant volatility and therefore are subject to changes in value. Based upon the current volatile nature of the U.S. securities markets and the decline in the U.S. economy, we believe that it is possible, that the market values of our equity securities could decline in the near term. We have a policy in place to review our equity holdings on a regular basis. Our policy includes, but is not limited to, reviewing each company’s cash position, earnings/revenue outlook, stock price performance, liquidity and management/ownership. American seeks to manage exposure to adverse equity returns in the future by potentially increasing the diversity of our securities portfolios.
10
Note 3 - Inventory and Deposits for Pipe Inventory Purchases
Inventories consisted of the following:
September 30, 2010
|
December 31, 2009
|
|||||||
Finished goods
|
$ | 5,417,297 | $ | 4,255,755 | ||||
Less reserve
|
(43,215 | ) | (96,021 | ) | ||||
$ | 5,374,082 | $ | 4,159,734 |
Periodically, American enters into agreements to purchase pipe inventory from vendors. At December 31, 2009, American had cash deposits of $1,336,244 for inventory purchases under these agreements that had not been received. At September 30, 2010, these pipe purchases are included in inventory.
Note 4 - Real Estate Transactions
During the fourth quarter of 2009, American foreclosed on real property which was security for a note receivable owed to American, which was in default. At December 31, 2009, American was carrying this property on the balance sheet for $4,611,233, which represented $3,332,543 in principal and accrued interest allocated to the property received at the time of default and the assumption of a $1,278,690 note payable secured by the property by another lien holder, see Note 8. This property consisted of seven tracts, of which several are under contract for sale and the remainder are listed for sale with a broker. During the three months ended September 30, 2010, American sold an 8 acre tract recorded at $175,480 for $340,445, which was used to reduce the note payable balance to $938,245. American recognized in the consolidated statements of operations a $164,965 gain on sale of assets for this transaction.
During the third quarter of 2009, and in connection with the guarantor’s fee described below, Texas Community Bank made a loan for $3,850,000 to Southwest Gulf Coast Properties, Inc. ("SWGCP") for the purchase of Dawn Condominiums L.P. This loan is secured by American's 287 acres on Dickinson Bayou and the Dawn Condominiums, located in Galveston, Texas, with an appraised value of over $3,900,000. American has an account receivable of $573,969 from SWGCP at September 30, 2010, resulting from closing costs, principal and interest paid by American on the loan. This property is listed for sale with a broker. Until the properties are sold, rental income from the condominium units will be used to pay interest on the loan and the receivable balance owed to American.
During the fourth quarter of 2008, American received a 1.705 acre tract of land in Galveston County valued at $540,000 as a guarantor's fee. In connection with this fee, American pledged $1,750,000 in certificates of deposit for a $4,000,000 loan to Dawn Condominiums L.P. at Texas Community Bank. During the third quarter of 2009, the principal balance of the loan was repaid and the bank released the pledged certificates of deposit to American. This property is listed for sale with a broker.
During 2007, American purchased for investment a 174 acre tract of land in Waller County, Texas for $1,684,066. This property is listed for sale with a real estate broker. American also owns 287 undeveloped acres of waterfront property on Dickinson Bayou and Galveston Bay in Galveston County, Texas. American is carrying this property on the balance sheet at its historical book value of $225,000. American has engaged an independent broker on an exclusive basis to sell the property. These properties are not going to be developed by nor are they being held as inventory by American. These properties are listed for sale with a broker.
American reviewed the accounting standards Real Estate - General (ASC 970-10) and Property, Plant, and Equipment (ASC 360-10) to determine the appropriate classification for these properties. According to ASC 970-10, real estate that is held for sale in the ordinary course of business is classified as inventory, which is a current asset. ASC 360-10 provides the following criteria for property to be classified as held for sale:
-
Management with the appropriate authority commits to a plan to sell the asset;
-
The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;
-
An active program to locate a buyer and other actions required to complete the plan of sale have been initiated;
-
The sale of the property or asset within one year is probable and will qualify for accounting purposes as a sale;
-
The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
-
Actions required to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Management consulted with the real estate brokers for these properties and reviewed the recent interest for each property. Based on our consultations and review, we believe that the sale of these properties within one year is probable. With the exception of American's 287 acres, we concluded that all of these criteria have been met for these properties and that they are appropriately classified as held for sale in current assets. The 287 acres is classified as held for sale in long-term assets.
11
Note 5 - Long-term Notes Receivable
Long-term notes receivable consists of the following:
September 30, 2010
|
December 31, 2009
|
|||||||
Unsecured note receivable for sale of former subsidiary, Marald, Inc., principal and interest due monthly through June 5, 2012
|
$ |
68,558
|
$ |
95,523
|
||||
Unsecured note receivable for sale of former subsidiary, Marald, Inc., due in monthly payments of $3,074, including interest at 4%, beginning April 1, 2011 through March 1, 2021 (a)
|
300,000
|
200,000
|
||||||
Unsecured note receivable, principal balance due on April 30, 2008, interest at 6% through maturity and at 10% thereafter (b) |
-
|
552,063
|
||||||
Unsecured note receivable, principal balance due on December 31, 2008, interest at 10% through maturity and at 15% thereafter (b) |
-
|
250,000
|
||||||
Note secured by property and shares of stock, interest due monthly at 18%, principal payment due on or before May 9, 2009 |
-
|
35,000
|
||||||
Unsecured note receivable purchased from Texas Community Bank, interest at 8% due monthly, principal due January 2009 (c) |
300,000
|
300,000 | ||||||
Note secured by shares of DCP stock, interest due quarterly at 5%, principal payment due on or before June 23, 2012 | 55,000 | - | ||||||
Notes receivable
|
723,558
|
1,432,586
|
||||||
Less current portion
|
(338,220
|
) |
(1,173,334
|
) | ||||
Long-term notes receivable
|
$
|
385,338
|
$
|
259,252
|
(a) Sale of former subsidiary, Marald, Inc., principal and interest due monthly through July 2012. The original note was for $300,000 and was discounted to $200,000 for the receipt of full payment on or before October 25, 2007. Marald is currently in default on its payments. On May 4, 2010, a new promissory note was executed in the amount of $300,000 for the note balance plus accrued interest, with the payment terms indicated above. Since payments are currently being made on the other note receivable with Marald in accordance with note terms, no further discounting of the loan was deemed necessary as of September 30, 2010.
(b) Unsecured notes receivable due April 30 and December 31, 2008. These delinquent notes were due from Hammonds Industries, Inc. ("Hammonds"). The assets of the Hammonds' companies were sold on April 16, 2009. On August 13, 2009, Hammonds, American, Delta, and the noncontrolling-interest owners of Delta entered into an agreement to commence a reverse merger of Delta into Hammonds. This agreement includes a provision to issue common shares for these unsecured notes. American closed this transaction in February 2010 and Hammonds issued 10,000,000 post-Reverse Split common shares at fair value of $0.087 per share in consideration for the conversion of the principal and interest on these notes.
(c) Note purchased from Texas Community Bank with a face amount of $300,000. This delinquent note was purchased on September 30, 2009 for $300,000 and new payment terms are being negotiated for this note receivable with the debtors, Las Vegas Premium Gold. This note was purchased as an investment to receive the interest income from the note. Management has assessed this note for impairment and feels that collectability is reasonably possible based on the personal guarantees of the principals.
Interest income on notes receivable is recognized principally by the simple interest method. During the three and nine months ended September 30, 2010 and 2009, American recognized interest income of $7,307, $44,804, $21,467 and $180,436, respectively.
Note 6 - Property and Equipment
Major classes of property and equipment together with their estimated useful lives, consisted of the following:
Years
|
September 30, 2010
|
December 31, 2009
|
|||||||
Land
|
$
|
507,661
|
$
|
892,945
|
|||||
Building and improvements
|
20
|
962,010
|
1,003,870
|
||||||
Machinery and equipment
|
7-15
|
3,412,573
|
3,284,891
|
||||||
Office equipment and furniture
|
7
|
283,546
|
279,450
|
||||||
Automobiles
|
5
|
745,712
|
745,712
|
||||||
5,911,502
|
6,206,868
|
||||||||
Less accumulated depreciation and amortization
|
(3,324,187
|
)
|
(2,979,319
|
)
|
|||||
Net property and equipment
|
$
|
2,587,315
|
$
|
3,227,549
|
12
During the three months ended June 30, 2010, American sold its 51% ownership in Delta's facilities with a book value of $422,737 to Southwest Gulf Coast Properties, Inc. ("SWGCP"). SWGCP assumed the $943,500 note payable on the property. American recognized a $520,763 gain on sale of assets for this transaction. During the three months ended September 30, 2010, Wintech Partners, LLC ("Wintech"), a company owned by the noncontrolling interest owners of Delta, acquired this 51% ownership and assumed the note payable. Wintech now owns 100% of Delta's facilities and is responsible for the associated $1,850,000 note payable. American and Wintech entered into a profit sharing agreement in October 2010, whereby American will receive 50% of any profit if the property is sold, based on the sales price for the property less any outstanding balance on the note payable.
Depreciation expense for the three and nine months ended September 30, 2010 and 2009 was $113,824, $131,226, $349,273 and $396,343, respectively.
Note 7 - Intangible Assets
Intangible assets at September 30, 2010 and December 31, 2009 consisted of goodwill of $674,539 related to the acquisition of NPI.
Note 8 - Short-term Notes Payable
September 30, 2010
|
December 31, 2009
|
|||||||
Insurance note payable with interest at 4.99% principal and interest due in monthly payments of $22,796 through May 1, 2011 | $ | 159,570 | $ | 103,218 | ||||
Note payable with interest at 12%, interest due monthly, with a principal balance due on August 1, 2010, secured by real property (a) | 938,245 | 1,278,690 | ||||||
$
|
1,097,815
|
$
|
1,381,908
|
(a) This note was assumed as part of the foreclosure on property that was security for a note receivable owed to American. See Note 4. This note was due on August 1, 2010 and American is in the process of renewing the note or refinancing with another institution.
Each of American's subsidiaries that have outstanding notes payable has secured such notes by that subsidiary’s inventory, accounts receivable, property and equipment and guarantees from American. At September 30, 2010 and December 31, 2009, the average annual interest rates of our short-term borrowings were approximately 10.98% and 11.48%, respectively.
13
Note 9 - Long-term Debt
Long-term debt consisted of the following:
September 30, 2010
|
December 31, 2009
|
|||||||
Revolving line of credit to a bank, which allows Delta to borrow up to $2,000,000, due in monthly payments of interest only, with interest at prime floating rate, with the principal balance due in April 2011, secured by assets of Delta.
|
$ |
1,433,527
|
$ |
1,369,907
|
||||
Note payable to a bank, due in monthly installments of interest only, principal balance due June 13, 2010 with interest at 1% above the prime rate secured by real property.
|
-
|
943,500
|
||||||
Note payable to a bank, due in monthly installments of $6,170, including interest at 6.6% through May 2018, secured by real property.
|
440,722
|
473,285
|
||||||
Note payable to a bank, which allows NPI to borrow up to $3,250,000, interest due monthly at 6.5%, principal balance due December 31, 2010, secured by assets of NPI. (a)
|
1,577,000
|
1,099,000
|
||||||
Note payable to a bank, due in quarterly payments of interest only, with interest at 6%, with a principal balance due on May 2011, secured by real property.
|
1,566,000
|
1,566,000
|
||||||
Note payable due in monthly payments of $19,373, including interest at 6%, through March 2013, secured by assets of Delta.
|
619,961
|
761,982
|
||||||
Note payable to a bank, due in monthly payments of $6,120, including interest at 8.25%, through August 9, 2012, secured by assets of Delta.
|
124,323
|
174,990
|
||||||
Other secured notes with various terms
|
24,270
|
39,011
|
||||||
5,785,803
|
6,427,675
|
|||||||
Less current portion
|
(4,919,060
|
)
|
(3,731,428
|
)
|
||||
$
|
866,743
|
$
|
2,696,247
|
(a) On October 30, 2009, NPI received a notice that it is in technical default of the fixed charge coverage ratio covenant on its line of credit with Wachovia. The principal balance of this note was due August 31, 2010. NPI is not in payment default and has been current with all of its debt and interest payments since the inception of the line of credit. NPI will be required to submit financial statements and a borrowing base certificate to the bank on a monthly rather than quarterly basis, as was previously required. Wells Fargo acquired Wachovia and due to the bank’s new policies, the special assets management lending group requested that the asset based lending group review NPI for a new loan. This group declined the loan and the bank has recommended another lender. The technical default has been resolved and Wachovia has extended the line of credit to December 31, 2010.
Each of American's subsidiaries that have outstanding notes payable has secured such notes by that subsidiary’s inventory, accounts receivable, property and equipment and guarantees from American.
Principal repayment provisions of long-term debt are as follows at September 30, 2010:
2010
|
$
|
1,670,760
|
||
2011
|
3,333,966
|
|||
2012
|
316,896
|
|||
2013
|
185,901
|
|||
2014
|
57,385
|
|||
Thereafter
|
220,895
|
|||
Total
|
$
|
5,785,803
|
14
American is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.001 par value per share, of which no shares are presently outstanding. The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion, redemption rights and sinking fund provisions.
American is authorized to issue up to 50,000,000 shares of Common Stock, $0.001 par value per share, of which 1,036,800 are reserved for issuance pursuant to the exercise of options pursuant to an employment agreement with American's Chairman and CEO.
During the nine months ended September 30, 2010, American purchased 5,300 common shares as treasury stock for $5,174. American issued 1,000,000 restricted shares of common stock for cash consideration of $1,015,200 for investment from International Diversified Corporation, Ltd., Dror Charitable Foundation for the Arts, Daniel Dror II Trust of 1976, and the Dror Family Trust, all of which are related parties to Daniel Dror, CEO. From April 2010 through September 2010, Brenham issued 13,000,000 shares of common stock for cash consideration of $22,100.
On March 30, 2008, American issued 172,800 stock options to American's Chairman and CEO, with an exercise price of $5.83 per share, expiring in 2 years, valued at $88,063 and recorded as share-based compensation. In connection with American's 20% stock dividend to all shareholders on July 16, 2008, the terms of these options were adjusted to reflect the dividend, resulting in the option being exercisable to buy 207,360 shares for $4.86 per share. These options expired on March 30, 2010.
American estimated the fair value of each stock option at the grant date as $0.51 by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2008 as follows:
March 30, 2008
|
||||
Dividend yield
|
0.00 | % | ||
Expected volatility
|
38.64 | % | ||
Risk free interest
|
2.5 | % | ||
Expected lives
|
2 years
|
A summary of the status of American's stock options to employees for the nine months ended September 30, 2010 is presented below:
Shares
|
Weighted Average Exercise Price
|
|||||||
Outstanding and exercisable as of December 31, 2009
|
207,360
|
$
|
4.86
|
|||||
Granted | - | N/A | ||||||
Exercised
|
- | N/A | ||||||
Canceled / Expired
|
(207,360 | ) | 4.86 | |||||
Outstanding and exercisable as of September 30, 2010
|
-
|
$
|
N/A
|
Stock-based compensation consists of the following:
Nine Months Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Common shares issued for services
|
$ | 1,174,803 | $ | 436,430 | ||||
Stock options issued for services
|
- | - | ||||||
Stock-based compensation
|
$ | 1,174,803 | $ | 436,430 |
15
Note 11 - Concentration of Credit Risk
American maintains its cash and certificates of deposit in commercial accounts at major financial institutions. Although the financial institutions are considered creditworthy, at September 30, 2010, American's cash and certificates of deposit balances held in banks exceeded the limit covered by the Federal Deposit Insurance Corporation by approximately $1.3 million. The terms of these deposits are on demand to minimize risk. American has not incurred losses related to these deposits.
Trade accounts receivable subject American to the potential for credit risk with customers in the retail and distribution sectors. To reduce credit risk, American performs ongoing evaluations of its customer’s financial condition but generally does not require collateral. As of and during the nine months ended September 30, 2010, NPI had one customer that accounted for 50% of trade accounts receivable and 35% of revenues on a consolidated basis.
Note 12 - Income Taxes
American has loss carry-forwards totaling $17,286,434 available at September 30, 2010 that may be offset against future taxable income. If not used, the carry-forwards will expire as follows:
Operating Losses
|
|||
Amount
|
Expires
|
||
$
|
1,761,086
|
2018
|
|
|
1,462,959
|
2019
|
|
|
2,086,064
|
2020
|
|
860,006 | 2022 | ||
566,409 | 2023 | ||
1,028,302 | 2024 | ||
|
1,551,019
|
2025
|
|
73,187 | 2026 | ||
|
288,855
|
2027
|
|
3,626,977 |
2028
|
||
3,981,570 | 2029 | ||
$ | 17,286,434 |
Note 13 - Commitments and Contingencies
On July 23, 2008, Delta Seaboard Well Service, Inc. negotiated a settlement in the Fort Apache Energy, Inc. v. Delta Seaboard Well Service, Inc. lawsuit for $1,450,000. After non-controlling interest, the net impact of this settlement on American's net income is $739,500. Delta recovered $700,000 of this loss through insurance as described below.
Delta Seaboard Well Service, Inc. v. Houstoun, Woodard, Eason, Gentle Tomforde and Anderson, Inc., D/B/A Insurance Alliance and Robert Holman (“Broker Lawsuit”). On February 19, 2010, Delta settled its claims in the Broker Lawsuit and received $700,000, which will be included in other income for the three months ended September 30, 2010.
16
American International Industries, Inc. v. William W. Botts. American filed this lawsuit against William W. Botts (“Botts”) seeking damages as a result of a Stock Purchase Agreement and Consulting Agreement that American entered into with Botts on September 12, 2007. Under the Stock Purchase Agreement, American gave Botts $1,000,000 in cash and 288,000 shares of restricted AMIN stock (240,000 original shares plus a 20% stock dividend) for 170,345 shares of OI Corporation. As part of the original agreement, Botts had the right to sell the 288,000 shares back to American for $4.17 per share. Under the Consulting Agreement, American agreed to pay Botts $14,000 per month, plus expenses for performing consulting services. On or about November 5, 2008, American paid Botts $100,000 to terminate the Consulting Agreement to stop the accrual of monthly consulting payments to Botts. In February 2010, the case was mediated and the parties attempted to settle the case. However, the parties have been unable to agree on terms. The trial court has not yet entered a final judgment, and the trial court’s summary judgment order remains an interlocutory order that does not resolve all of Botts's counterclaims against American. American intends to file its own motion for summary judgment against Botts's remaining counter claims. If and when the judgment becomes final, American intends to appeal. American has retained Byron Keeling, who is a highly regarded appellate attorney. American believes that the trial court erred in its partial summary judgment and American intends to appeal any final judgment that the trial court may enter in the case. If American wins on appeal the case probably will have to be tried. If American loses the appeal, management believes that the maximum loss for American would be $1,500,000, exclusive of attorney fees. If the case is tried, American intends to vigorously defend this case. A complete evaluation of the outcome of this case cannot be made at this time. American hopes to prevail in these matters and has not yet recorded any liabilities in connection with this lawsuit.
Delta is the recipient of a Texas Emissions Reduction Plan ("TERP") grant from the Texas Commission on Environmental Quality in the amount of $1,157,273, of which $781,728 has been recognized through December 31, 2008. For the nine months ended September 30, 2010, no TERP grant revenue has been recognized. TERP is a comprehensive set of incentive programs aimed at improving air quality in Texas. Through this grant, Delta’s rig engines are being replaced with engines certified to emit 25% less nitrogen oxide (“NOx”) than required under the current federal standard for the horsepower of the engines. The old engines must be destroyed or rendered permanently inoperable.
TERP grant recipients are required to monitor and track the total NOx emission reductions and cost-effectiveness. The grant contract includes provisions for the return of a prorated share of the grant if the NOx emission reductions originally projected are not achieved. Delta has not recorded any liabilities in connection with this matter because management has determined that return of any grant receipts is not likely. Based on the advice of the State of Texas authorities who administer the grant, the taxability of this grant has not been determined and the advice of the Internal Revenue Service has been inconsistent. Delta is still determining the effect this will have, but believes it will not materially affect Delta because of tax loss carry-forwards.
Note 14 - Segment Information
We have four reporting segments and corporate overhead:
· Northeastern Plastics (NPI) - a wholly-owned subsidiary, is a supplier of automotive after-market products and consumer durable goods products to retailers and wholesalers in the automotive after-market and in the consumer durable electrical products markets; | |
· Delta Seaboard International (Delta) - a 48.1% owned subsidiary, is an onshore rig-based well-servicing contracting company providing services to the oil and gas industry; | |
· Downhole Completion Products, Inc. (DCP) - an 80% owned subsidiary, provides major international oil and gas service company end-users with the highest quality proprietary downhole/completion threaded products under any condition. | |
· Corporate overhead - American's investment holdings including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses. Corporate overhead also includes Brenham Oil & Gas, a division that owns an oil, gas and mineral royalty interest in Washington County, Texas, which is carried on American's balance sheet at $0. Through Brenham Oil & Gas, American is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves. The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa. American owns 54,680,074 shares of common stock, representing 54.7% of BOG’s total outstanding shares. |
17
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. American evaluates performances based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. American's reportable segments are strategic business units that offer different technology and marketing strategies. Most of the businesses were acquired as subsidiaries and the management at the time of the acquisition was retained. American's areas of operations are principally in the United States. No single foreign country or geographic area is significant to the consolidated financial statements.
Consolidated revenues from external customers, operating income (loss), depreciation and amortization expense, interest expense, capital expenditures, non-cash transactions, and identifiable assets were as follows:
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues:
|
||||||||||||||||
Northeastern Plastics
|
$
|
7,032,494
|
$
|
4,123,329
|
$
|
11,234,563
|
$
|
7,761,016
|
||||||||
Delta Seaboard
|
2,424,500
|
2,151,180
|
6,708,240
|
6,946,305
|
||||||||||||
Downhole Completion Products
|
303,379
|
-
|
665,228
|
-
|
||||||||||||
Brenham Oil & Gas | 1,252 | - | 1,252 | - | ||||||||||||
Total revenues
|
$
|
9,761,625
|
$
|
6,274,509
|
$
|
18,609,283
|
$
|
14,707,321
|
||||||||
Operating income (loss) from continuing operations:
|
||||||||||||||||
Northeastern Plastics
|
$
|
685,634
|
$
|
194,632
|
|
$
|
794,542
|
$
|
131,204
|
|
||||||
Delta Seaboard
|
96,872 | 40,994 | (1,328,312 | ) | (333,299 | ) | ||||||||||
Downhole Completion Products
|
23,037 | - | 23,968 | - | ||||||||||||
Corporate
|
(436,551 | ) | (1,076,665 | ) | (1,219,270 | ) | (1,790,317 | ) | ||||||||
Operating profit (loss) from continuing operations
|
368,992
|
|
(841,039
|
)
|
(1,729,072
|
)
|
(1,992,412
|
)
|
||||||||
Other income (expenses) from continuing operations
|
(160,104
|
) |
167,001
|
|
2,712,170
|
394,764
|
||||||||||
Net income (loss) from continuing operations before income tax
|
$
|
208,888
|
$
|
(674,038
|
)
|
$
|
983,098
|
$
|
(1,597,648
|
)
|
||||||
Depreciation and amortization:
|
||||||||||||||||
Northeastern Plastics
|
$
|
14,859
|
$
|
15,755
|
$
|
44,550
|
$
|
47,065
|
||||||||
Delta Seaboard
|
97,014
|
113,250
|
297,325
|
342,456
|
||||||||||||
Corporate
|
1,951
|
2,221
|
7,398
|
6,822
|
||||||||||||
Total depreciation and amortization
|
$
|
113,824
|
$
|
131,226
|
$
|
349,273
|
$
|
396,343
|
||||||||
Interest expense:
|
||||||||||||||||
Northeastern Plastics
|
$
|
31,440
|
$
|
18,094
|
$
|
82,343
|
$
|
52,596
|
||||||||
Delta Seaboard
|
31,726
|
63,317
|
116,991
|
177,920
|
||||||||||||
Corporate
|
50,598
|
42,061
|
143,387
|
155,758
|
||||||||||||
Total interest expense
|
$
|
113,764
|
$
|
123,472
|
$
|
342,721
|
$
|
386,274
|
||||||||
Capital expenditures:
|
||||||||||||||||
Northeastern Plastics
|
$
|
433
|
$
|
-
|
$
|
1,559
|
$
|
1,209
|
||||||||
Delta Seaboard
|
37,036
|
24,403
|
130,218
|
117,844
|
||||||||||||
Downhole Completion Products
|
(1,149 | ) | - | - | - | |||||||||||
Corporate
|
-
|
(723
|
) |
-
|
36,820
|
|||||||||||
Total capital expenditures
|
$
|
36,320
|
$
|
23,680
|
$
|
131,777
|
$
|
155,873
|
18
Nine months ended September 30,
|
||||||||||||||||
|
|
2010
|
2009
|
|||||||||||||
Non-cash transactions:
|
||||||||||||||||
Delta
|
-
|
|||||||||||||||
Accounts payable and dividends payable assumed in Delta reverse merger transaction
|
$
|
597,131
|
$
|
-
|
||||||||||||
Delta dividends declared and unpaid
|
$
|
180,000
|
$
|
-
|
||||||||||||
Corporate
|
||||||||||||||||
Unrealized loss on available for sale securities | $ | 320,000 | $ | - | ||||||||||||
Note receivable issued for common stock of DCP | $ | 55,000 | $ | - | ||||||||||||
Real property received in foreclosure on note receivable | $ | 66,304 | $ | - | ||||||||||||
Receipt of common stock to convert promissory note due from Delta
|
$
|
872,352
|
$
|
-
|
||||||||||||
Adjustment to noncontrolling interest in Delta, DCP, and BOG
|
$
|
295,279
|
$
|
-
|
September 30, 2010
|
December 31, 2009
|
|||||||
Identifiable assets:
|
||||||||
Northeastern Plastics
|
$
|
11,141,227
|
$
|
6,013,175
|
||||
Delta
|
6,038,143
|
6,123,301
|
||||||
Downhole Completion Products
|
314,230
|
-
|
||||||
Corporate
|
12,942,719
|
13,438,071
|
||||||
Assets held for sale | 5,477,581 | 5,437,622 | ||||||
Total identifiable assets
|
$
|
35,913,900
|
$
|
31,012,169
|
Note 15 - Related Party Transactions
On March 4, 2010, American issued 1,000,000 restricted shares of common stock for cash consideration of $1,015,200 for investment from International Diversified Corporation, Ltd., Dror Charitable Foundation for the Arts, Daniel Dror II Trust of 1976, and the Dror Family Trust, all of which are related parties to Daniel Dror, CEO.
During the three months ended June 30, 2010, American sold its 51% ownership in Delta's facilities with a book value of $422,737 to Southwest Gulf Coast Properties, Inc. ("SWGCP"). SWGCP assumed the $943,500 note payable on the property. American recognized a $520,763 gain on sale of assets for this transaction. During the three months ended September 30, 2010, Wintech Partners, LLC ("Wintech"), a company owned by the noncontrolling interest owners of Delta, acquired this 51% ownership and assumed the note payable. Wintech now owns 100% of Delta's facilities and is responsible for the associated $1,850,000 note payable. American and Wintech entered into a profit sharing agreement in October 2010, whereby American will receive 50% of any profit if the property is sold, based on the sales price for the property less any outstanding balance on the note payable.
Note 16 - Assets held for sale
During the three months ended September 30, 2010, American began activities to sell the assets and associated liabilities of its wholly-owned subsidiary, SET, which are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheets as of December 31, 2009 and September 30, 2010 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20). SET's losses are included in Discontinued operations - assets held for sale, net of income taxes in the consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009 and in the consolidated statement of cash flows for the nine months ended September 30, 2010 and 2009. Negotiations for the sale of these assets and associated liabilities are at various stages with prospective buyers. Management believes that the book value of SET's assets and associated liabilities represents the fair value of the business and does not anticipate any losses as a result of the sale.
19
The carrying amounts of the major classes of assets and liabilities for SET at September 30, 2010 and December 31, 2009 are summarized below:
September 30, 2010
|
December 31, 2009
|
|||||||
Assets held for sale
|
||||||||
Current assets held for sale:
|
||||||||
Cash and cash equivalents
|
$
|
2,867
|
$
|
35,048
|
||||
Accounts receivable
|
639,625 | 303,696 | ||||||
Accounts receivable from related parties
|
-
|
194,609
|
||||||
Inventories
|
584,599
|
286,481
|
||||||
Prepaid expenses and other current assets | 6,116 | 16,555 | ||||||
Total current assets held for sale
|
1,233,207
|
836,389
|
||||||
|
||||||||
Property and equipment, net of accumulated depreciation and amortization
|
3,644,988
|
3,916,670
|
||||||
Intangible assets, net of amortization
|
531,716
|
611,474
|
||||||
Other assets | 67,670 | 73,089 | ||||||
Total assets held for sale
|
$
|
5,477,581
|
$
|
5,437,622
|
||||
Liabilities associated with assets held for sale | ||||||||
Current liabilities associated with assets held for sale:
|
||||||||
Accounts payable and accrued expenses
|
$
|
1,407,968 |
$
|
610,410
|
||||
Short-term notes payable
|
500,000
|
500,000
|
||||||
Accounts and notes payable to related parties
|
-
|
186,300
|
||||||
Current installments of long-term debt
|
945,942
|
710,280
|
||||||
Current installments of long-term capital lease obligations | 129,398 | 81,819 | ||||||
Total current liabilities associated with assets held for sale
|
2,983,308
|
2,088,809
|
||||||
Long-term debt, less current installments
|
4,372,029
|
4,568,315
|
||||||
Long-term capital lease obligations, less current installments | 123,230 | 85,004 | ||||||
Total liabilities associated with assets held for sale
|
$ |
7,478,567
|
$ |
6,742,128
|
SET's revenues and net loss before income tax are summarized below:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
September 30, 2010
|
September 30, 2009
|
||||||||||||
|
||||||||||||||||
Revenues
|
$ | 1,485,119 | $ |
2,234,510
|
$ | 4,058,527 | $ |
6,228,827
|
||||||||
Net loss before income tax
|
$ | (372,011 | ) | $ |
(238,880
|
) | $ | (1,095,381 | ) | $ | (278,082 | ) |
Note 17 - Subsequent Events
From October 1, 2010 through November 15, 2010, American paid $26,304 to repurchase 41,800 shares of its common stock for treasury.
20
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 four reporting segments and corporate overhead:
· Northeastern Plastics (NPI) - a wholly-owned subsidiary, is a supplier of automotive after-market products and consumer durable goods products to retailers and wholesalers in the automotive after-market and in the consumer durable electrical products markets; | |
· Delta Seaboard International (Delta) - a 48.1% owned subsidiary, is an onshore rig-based well-servicing contracting company providing services to the oil and gas industry; | |
· Downhole Completion Products, Inc. (DCP) - an 80% owned subsidiary, provides major international oil and gas service company end-users with the highest quality proprietary downhole/completion threaded products under any condition. | |
· Corporate overhead - American's investment holdings including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses. Corporate overhead also includes Brenham Oil & Gas, a division that owns an oil, gas and mineral royalty interest in Washington County, Texas, which is carried on American's balance sheet at $0. Through Brenham Oil & Gas, American is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves. The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa. American owns 54,680,074 shares of common stock, representing 54.7% of BOG’s total outstanding shares. |
During the three months ended September 30, 2010, American began activities to sell the assets and associated liabilities of its wholly-owned subsidiary, SET, which are classified as assets held for sale and associated liabilities of assets held for sale in the consolidated balance sheets as of December 31, 2009 and September 30, 2010 in accordance with Presentation of Financial Statements - Discontinued Operations (ASC 205-20). SET's losses are included in Discontinued operations - assets held for sale, net of income taxes in the consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009 and in the consolidated statement of cash flows for the nine months ended September 30, 2010 and 2009. Negotiations for the sale of these assets and associated liabilities are at various stages with prospective buyers. Management believes that the book value of SET's assets and associated liabilities represents the fair value of the business and does not anticipate any losses as a result of the sale.
On February 3, 2010, Hammonds Industries Inc. ("Hammonds") and Delta Seaboard Well Service, Inc. ("Delta Seaboard"), a Texas corporation, completed a reverse merger ("Reverse Merger"). In connection with the reverse merger, Hammonds changed its name to Delta Seaboard International, Inc. and effected a one-for-ten (1:10) reverse stock split ("Reverse Split") of its common stock. Following the effective date of the Reverse Split, Delta issued shares of common stock to the existing stockholders of Delta Seaboard as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta Seaboard, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,353 in principal and accrued interest of debt payable by Delta to American; (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., a newly appointed director of Delta as well as Delta Seaboard’s president and a director of American and Ron Burleigh, a newly-appointed director of Delta as well as Delta Seaboard’s vice president, in consideration for their 49% equity ownership of Delta Seaboard; and (iii) 9,607,843 post-Reverse Split shares in consideration for Messrs. Derrick and Burleigh extending their employment agreements for five years in addition to the balance of their current employment agreements. Following the Reverse Split and Reverse Merger, American owns 32,859,935 shares of common stock, representing 48.1% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 30,924,353 shares of common stock, representing 45.2% of Delta's total outstanding shares. All other stockholders of Delta own 4,557,962 shares of common stock, representing 6.7% of Delta's total 68,342,250 outstanding shares. As part of the Reverse Merger, Delta assumed $709,552 in liabilities from Hammonds, including $615,000 in preferred dividends payable in shares of Delta's common stock.
21
On June 23, 2010, Joe Hoover, President of DCP, purchased 20% of the 1,000 shares of common stock of DCP for $20,000 in cash and a $55,000 promissory note.
The historical financial statements of the Company include the acquisitions of acquired companies as of the effective dates of the purchases, and the results of those companies subsequent to closing, as these transactions were accounted for under the purchase method of accounting.
We intend to continue our efforts to grow through the acquisition of additional and complimentary businesses and by expanding the operations of our existing businesses, especially in the energy sector. We will evaluate whether additional and complimentary businesses can be acquired at reasonable terms and conditions, at attractive earnings multiples and which present opportunity for growth and profitability. These efforts will include the application of improved access to financing and management expertise afforded by synergistic relationships between the Company and its subsidiaries. Potential acquisitions are evaluated to determine that they would be accretive to earnings and equity, that the projected growth in earnings and cash flows are attainable and consistent with our expectations to yield desired returns to investors, and that management is capable of guiding the growth of operations, working in concert with others in the group to maximize opportunity. Periodically as opportunities present themselves, we may sell or merge the subsidiaries in order to bring value to the holding company and our shareholders and to enable the Company to acquire larger companies.
The Company’s real estate investment policy historically has been to acquire real estate for resale based upon our view of market conditions. Such properties are listed on the balance sheet as real estate acquired for resale. Real estate is not a segment of the Company's business.
We expect to face competition for acquisition candidates, which may limit the number of acquisition opportunities and may lead to higher acquisition prices. There can be no assurance that we will be able to identify, acquire or manage profitably of additional businesses or to integrate any acquired businesses into the Company without substantial costs, delays or other operational or financial problems. Further, acquisitions involve a number of risks, including possible adverse effects on our operating results, diversion of management's attention, failure to retain key personnel of the acquired business and risks associated with unanticipated events or liabilities. Some or all of which could have a material adverse effect on our business, financial condition and results of operations. The timing, size and success of our acquisition efforts and the associated capital commitments cannot be readily predicted. It is our current intention to finance future acquisitions by using shares of our common stock and other forms of financing as the consideration to be paid. In the event that the common stock does not have and maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept common stock as part of the consideration for the sale of their businesses, we may be required to seek other forms of financing in order to proceed with our acquisition program. If we do not have sufficient cash resources, our growth could be limited unless we are able to obtain additional equity or debt financing at terms acceptable to the Company.
Corporate overhead includes our investment activities for financing current operations and expansion of our current holdings, as well as evaluating the feasibility of acquiring additional businesses.
Results of Operations
Three and Nine Months Ended September 30, 2010 Compared to the Three and Nine Months Ended September 30, 2009.
The following is derived from, and should be read in conjunction with, our unaudited consolidated financial statements, and related notes for the three and nine months ended September 30, 2010 and 2009.
Net revenues. For the three months ended September 30, 2010, revenues from continuing operations were $9,761,625, compared to $6,274,509 for the three months ended September 30, 2009, representing an increase of $3,487,116, or 55.6%. Revenues from continuing operations were $18,609,283 for the nine months ended September 30, 2010, compared to $14,707,321 for the nine months ended September 30, 2009, representing an increase of $3,901,962, or 26.5%.
NPI's revenues during the three months ended September 30, 2010 were $7,032,494, compared to $4,123,329 for the three months ended September 30, 2009, representing an increase of $2,909,165, or 70.6%. NPI's revenues were $11,234,563 for the nine months ended September 30, 2010, compared to $7,761,016 for the nine months ended September 30, 2009, representing an increase of $3,473,547, or 44.8%. NPI's revenues increased primarily because NPI replaced a very large supplier for one of its major accounts, substantially increasing its business with this customer. Additionally, NPI's revenues increased due to the addition of several new accounts and increased orders for existing accounts.
22
During the three months ended September 30, 2010, Delta had revenues of $2,424,500, compared to $2,151,180 during the three-month period ended September 30, 2009, representing an increase of $273,320, or 12.7%. During the nine months ended September 30, 2010, Delta had revenues of $6,708,240, compared to $6,946,305 during the nine-month period ended September 30, 2009, representing a decrease of $238,065, or 3.4%. Rig service revenues decreased for the three and nine months ended September 30, 2010, compared to the same period in the prior year by $455,100 and $1,481,148, respectively. Rig service revenues have decreased due to major maintenance on two rigs during 2010. This was offset by an increase in pipe sales for the three and nine months ended September 30, 2010, compared to the same period in the prior year, of $728,420 and $1,243,083 respectively.
In 2010, the Company formed a new subsidiary, DCP. The results of DCP for the three and nine months ended September 30, 2010 are included in our results of operations. For the three and nine months ended September 30, 2010, DCP’s revenues were $303,379 and $665,228, respectively.
For the three and nine months ended September 30, 2010, Brenham's revenues were $1,252 and $1,252, respectively.
Cost of sales and margins. Cost of sales for the three months ended September 30, 2010 was $7,097,590, compared to $4,147,587 for the three months ended September 30, 2009, representing an increase of $2,950,003, or 71.1%. Cost of sales for the nine months ended September 30, 2010 was $12,768,321, compared to $8,937,055 for the nine months ended September 30, 2009, representing an increase of $3,831,266, or 42.9%. Margins for the three months ended September 30, 2010 were 27%, compared to 34% for the three months ended September 30, 2009. Margins for the nine months ended September 30, 2010 were 31%, compared to 39% for the nine months ended September 30, 2009. The primary reason for the decline in margins is due to the change in the mix of the revenues during the period. NPI’s margins are lower than those of our oil and gas related businesses. NPI’s revenues during the three and nine months ended September 30, 2010 were 72% and 60%, respectively, of total revenues compared to 65% and 53% for the three and nine months ended September 30, 2009, respectively. Additionally, Delta experienced a decline in margins during the three months ended March 31, 2010 compared to the same period in the prior year due to the sale of high-priced pipe from inventory. Margins on pipe sales were 2% for the three months ended March 31, 2010, compared to 25% during the same period in the prior year.
Selling, general and administrative. Selling, general and administrative expense for the three months ended September 30, 2010 was $2,295,043, compared to $2,967,961 for the three months ended September 30, 2009, representing a decrease of $672,918, or 22.7%. The decrease in general and administrative expenses is due primarily to a significant reduction in corporate operating costs, including executive salaries and related expenses, and lower expenses associated with the decline in rig service revenues. Selling, general and administrative expense for the nine months ended September 30, 2010 was $7,570,034, compared to $7,762,678 for the nine months ended September 30, 2009, representing a decrease of $192,644, or 2.5%. Non-cash stock-based compensation for the nine months ended September 30, 2010 was $1,174,803, compared to $436,430 for the nine months ended September 30, 2009, representing an increase of $738,373, of which $847,750 was to the executive officers of Delta in consideration for extending their employment agreements.
Income and Loss from operations. Our operating income for the three months ended September 30, 2010 was $368,992, compared to an operating loss of $841,039 for the three months ended September 30, 2009. Our operating losses for the nine months ended September 30, 2010 and 2009 were $1,729,072 and $1,992,412, respectively.
Total other income/expenses. Other expense was $160,104 for the three months ended September 30, 2010, compared to other income of $167,001 for the three months ended September 30, 2009, representing a decrease of $327,105 from the prior period. The decrease in other income was primarily due to a net loss for realized/unrealized gains and losses on trading securities of $53,670 for the three months ended September 30, 2010, compared to net income of $200,382 for the three months ended September 30, 2009. Additionally, interest and dividend income decreased by $59,080. Other income was $2,712,170 for the nine months ended September 30, 2010, compared to $394,764 for the nine months ended September 30, 2009, representing an improvement of $2,317,406 from the prior period. Other income for the nine months ended September 30, 2010 includes non-cash compensation for consulting services of $1,370,000. The Company received 1,000,000 restricted shares of ADB International Group, Inc. common stock valued at $1.37 per share for these consulting services. Other income for the nine months ended September 30, 2010 included gains on the sale of assets of $760,542. During the nine months ended September 30, 2010, American sold an 8 acre tract of land with a book value of $175,480 for $340,445 and recognized a $164,965 gain for this transaction, see Note 4. During the nine months ended September 30, 2010, American sold its 51% ownership in Delta's facilities with a book value of $422,737 and the purchaser assumed the $943,500 note payable on the property. American recognized a $520,763 gain for this transaction, see Note 6. Additionally, other income for the nine months ended September 30, 2010 included the receipt of $700,000 by Delta as a cash settlement for its claims in an insurance lawsuit.
Net income/loss. We had a net income from continuing operations of $207,764, or $0.02 per share, for the three months ended September 30, 2010, compared to a net loss of $682,895, or $0.08 per share, for the same period in 2009. We had a net income from continuing operations of $931,744, or $0.10 per share, for the nine months ended September 30, 2010, compared to a net loss of $1,623,656, or $0.19 per share, for the same period in 2009. We had a net loss from discontinued operations - asset sold of $350,000, or $0.04 per share, for the nine months ended September 30, 2009. We had a net loss from discontinued operations - assets held for sale for the three and nine months ended September 30, 2010 of $375,058, or $0.04 per share, and $1,103,630, or $0.11 per share, respectively, and for the three and nine months ended September 30, 2009 of $243,407, or $0.03 per share, and $290,687, or $0.03 per share, respectively.
23
Liquidity and Capital Resources
Total assets/working capital. Total assets at September 30, 2010 were $35,913,900, compared to $31,012,169 at December 31, 2009, representing an increase of $4,901,731. At September 30, 2010, consolidated working capital was $10,772,628, compared to working capital of $13,141,451 at December 31, 2009, representing a decrease of $2,368,823. Total assets as of September 30, 2010, included real estate held for sale of $6,980,680 (see Note 4), inventories of $5,374,082, accounts receivable of $8,247,544, cash and cash equivalents of $1,865,439, certificates of deposit of $1,093,430, $1,410,254 of trading securities, and $1,233,207 of assets held for sale. Long term assets included $2,587,315 of property and equipment, $1,050,000 of marketable securities – available for sale, consisting of 1,000,000 shares of ADB International Group, Inc. ("ADBI") common stock received as compensation for consulting services, and $4,244,374 of assets held for sale.
We had total liabilities of $21,229,609 as of September 30, 2010, which included $15,867,607 of current liabilities, mainly consisting of $6,729,924 of accounts payable and accrued expenses, $4,919,060 of current installments of long-term debt, and liabilities associated with assets held for sale of $2,983,308, and long-term liabilities of $5,362,002, consisting of $866,743 of long-term debt (less current installments) and $4,495,259 of liabilities associated with assets held for sale.
Cash flow from operations. For the nine months ended September 30, 2010, we used cash in operations of $818,248, compared to $1,142,144 during the same period in 2009. Our net income from continuing operations of $931,744 for the nine months ended September 30, 2010 included non-cash income of $2,130,542, including shares received for consulting services of $1,370,000 and gains on disposals of assets of $760,542. Non-cash expenses included in net income were $1,524,076, including depreciation and amortization of $349,273 and share-based compensation of $1,174,803. Our net loss from continuing operations of $1,623,656 for the nine months ended September 30, 2009 included non-cash expenses of $832,773, including depreciation and amortization of $396,343 and share-based compensation of $436,430. Our inventories decreased by $121,896 for the nine months ended September 30, 2010, compared to an increase of $25,021 during the nine months ended September 30, 2009. We decreased our investments in trading securities by $142,806 during the nine months ended September 30, 2010, compared to a decrease of $300,840 during the same period in 2009. Accounts receivable increased by $5,484,690 during the nine months ended September 30, 2010, compared to an increase of $1,901,307 during the same period in 2009. Accounts payable increased by $4,220,883 during the nine months ended September 30, 2010, compared to an increase of $1,558,175 during the same period in 2009.
Cash flow from investing activities. For the nine months ended September 30, 2010, our investing activities provided cash of $1,292,337 primarily as a result of proceeds from the sale of real estate held for sale of $943,500, from the sale of property and equipment of $340,445, and a net decrease in investments in certificates of deposit of $105,757, offset by the purchase of property and equipment of $131,777. Our investing activities provided cash of $1,379,179 during the nine months ended September 30, 2009, as a result of a net decrease in investments in certificates of deposit of $1,550,000, proceeds from notes receivable of $116,446, and loans from related parties of $168,606, offset by the issuance of a note receivable of $300,000 and purchases of property and equipment of $155,873.
Cash flow from financing activities. Our financing activities provided cash of $106,162 during the nine months ended September 30, 2010, primarily as a result of the issuance of common stock of $1,015,200 and net borrowings under lines of credit agreements and the issuance of debt of $792,373, offset by payments on debt of $1,718,337. During the nine months ended September 30, 2009, our financing activities used cash of $874,444, as a result of payments on debt of $1,769,763 and payments for the acquisition of treasury stock of $225,332, offset by net borrowings under lines of credit agreements and the issuance of debt of $1,120,651.
On October 30, 2009, NPI received a notice that it is in technical default of the fixed charge coverage ratio covenant on its line of credit with Wachovia. The principal balance of this note was due August 31, 2010. NPI is not in payment default and has been current with all of its debt and interest payments since the inception of the line of credit. NPI will be required to submit financial statements and a borrowing base certificate to the bank on a monthly rather than quarterly basis, as was previously required. Wells Fargo acquired Wachovia and due to the bank’s new policies, the special assets management lending group requested that the asset based lending group review NPI for a new loan. This group declined the loan and the bank has recommended another lender. The technical default has been resolved and Wachovia has extended the line of credit to December 31, 2010.
Our subsidiary, Delta has a line of credit for $2,000,000 with Trust Mark Bank, which has a maturity date in April 2011.
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Not applicable.
Evaluation of disclosure controls and procedures. As of September 30, 2010, the Company's chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in internal controls. During the quarterly period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
American International Industries, Inc. v. William W. Botts. American filed this lawsuit against William W. Botts (“Botts”) seeking damages as a result of a Stock Purchase Agreement and Consulting Agreement that American entered into with Botts on September 12, 2007. Under the Stock Purchase Agreement, American gave Botts $1,000,000 in cash and 288,000 shares of restricted AMIN stock (240,000 original shares plus a 20% stock dividend) for 170,345 shares of OI Corporation. As part of the original agreement, Botts had the right to sell the 288,000 shares back to American for $4.17 per share. Under the Consulting Agreement, American agreed to pay Botts $14,000 per month, plus expenses for performing consulting services. On or about November 5, 2008, American paid Botts $100,000 to terminate the Consulting Agreement to stop the accrual of monthly consulting payments to Botts. In February 2010, the case was mediated and the parties attempted to settle the case. However, the parties have been unable to agree on terms. The trial court has not yet entered a final judgment, and the trial court’s summary judgment order remains an interlocutory order that does not resolve all of Botts's counterclaims against American. American intends to file its own motion for summary judgment against Botts's remaining counter claims. If and when the judgment becomes final, American intends to appeal. American has retained Byron Keeling, who is a highly regarded appellate attorney. American believes that the trial court erred in its partial summary judgment and American intends to appeal any final judgment that the trial court may enter in the case. If American wins on appeal the case probably will have to be tried. If American loses the appeal, management believes that the maximum loss for American would be $1,500,000, exclusive of attorney fees. If the case is tried, American intends to vigorously defend this case. A complete evaluation of the outcome of this case cannot be made at this time. American hopes to prevail in these matters and has not yet recorded any liabilities in connection with this lawsuit.
There are no other updates to any legal proceedings previously disclosed.
There have been no material changes from Risk Factors as previously disclosed in the Registrant’s annual report for the year ended December 31, 2009.
During the nine months ended September 30, 2010, American purchased 5,300 common shares as treasury stock for $5,174. American issued 1,000,000 restricted shares of common stock for cash consideration of $1,015,200 for investment from International Diversified Corporation, Ltd., Dror Charitable Foundation for the Arts, Daniel Dror II Trust of 1976, and the Dror Family Trust, all of which are related parties to Daniel Dror, CEO.
None.
25
None.
None.
The following documents are filed as exhibits to this report on Form 10-Q or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical reference to the SEC filing that included such document.
Exhibit No.
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Description
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31.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
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32.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002
|
32.2
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Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
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26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ DANIEL DROR
CEO, PRESIDENT AND CHAIRMAN
Dated: November 15, 2010
/s/ SHERRY L. MCKINZEY
CHIEF FINANCIAL OFFICER
Dated: November 15, 2010