UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from _________ to _________ 

 

Commission File No.: 1-33640 

 

AMERICAN INTERNATIONAL INDUSTRIES, INC. 

 

(Exact Name Of Registrant As Specified In Its Charter) 

 

Nevada		88-0326480
(State of Incorporation)		(I.R.S. Employer Identification No.)
601 Cien Street, Suite 235, Kemah, TX		77565-3077
(Address of Principal Executive Offices)		(ZIP Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒   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  ☐	Accelerated filer  ☐
Non-accelerated filer  ☐	Smaller reporting company  ☒

 

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

 

The number of shares outstanding of each of the issuer’s classes of equity as of July 27, 2015  is 2,196,517 shares of common stock and 1,000 shares of preferred stock.

 

 

TABLE OF CONTENTS

 

Item		Description		Page
		PART I – FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS		3
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		20
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS		25
ITEM 4T.		CONTROLS AND PROCEDURES		25
		PART II – OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS		25
ITEM 1A.		RISK FACTORS		25
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		25
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES		25
ITEM 4.		MINE SAFETY DISCLOSURES		25
ITEM 5.		OTHER INFORMATION		25
ITEM 6.		EXHIBITS		25

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Financial Statements

 

Financial Statements
Unaudited Consolidated Balance Sheets – March 31, 2015 and December 31, 2014		4
Unaudited Consolidated Statements of Operations and Comprehensive Loss – Three Months Ended March 31, 2015 and 2014		5
Unaudited Consolidated Statements of Cash Flows – Three Months Ended March 31, 2015 and 2014		6
Notes to Unaudited Consolidated Financial Statements		7

 

 

AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

		March 31, 2015				December 31, 2014
Assets
Current assets:
Cash and cash equivalents		$	2,292,886			$	373,482
Restricted cash			678,867				—
Other current assets			12,132				8,144
Current portion of long-term notes receivable			60,000				2,346,053
Marketable securities - trading			118,983				—
Real estate held for sale			4,751,979				6,413,635
Current assets of discontinued operations			—				2,096,841
Total current assets			7,914,847				11,238,155
Long-term notes receivable, less current portion			771,028				485,690
Oil and gas properties, costs subject to amortization			88,059				87,541
Oil and gas properties, costs not subject to amortization			91,900				341,900
Property and equipment, net of accumulated depreciation			24,972				25,415
Marketable securities – available for sale			5,200				63,250
Other assets			4,005				4,005
Long-term assets of discontinued operations			—				409,194
Total assets		$	8,900,011			$	12,655,150
Liabilities and Equity
Current liabilities:
Accounts payable and accrued expenses		$	2,039,848			$	1,532,104
Accounts payable to related parties			131,124				235,124
Short-term notes payable			—				131,081
Current portion of long-term debt			18,000				241,902
Current liabilities of discontinued operations			—				492,395
Total current liabilities			2,188,972				2,632,606
Asset retirement obligations			5,831				5,621
Long-term debt, less current portion			358,783				454,286
Long-term debt to related party, less current portion			300,000				300,000
Long-term liabilities of discontinued operations			—				2,013,640
Total liabilities			2,853,586				5,406,153
Commitments and contingencies
Equity:
Preferred stock, $0.001 par value, 1,000,000 shares authorized, 1,000 shares issued and outstanding			1				1
Common stock, $0.001 par value, 50,000,000 shares authorized;
2,226,396 and 2,423,986 shares issued, respectively and 2,221,358 and 2,418,948 shares outstanding, respectively			2,226				2,424
Less: treasury stock, at cost; 29,192 and 265,175 shares, respectively			(919,483	)			(1,155,084	)
Additional paid-in capital			38,946,273				39,150,266
Accumulated deficit			(30,539,561	)			(29,396,383	)
Accumulated other comprehensive loss			(1,399,800	)			(1,341,750	)
Total equity attributable to American International Industries, Inc.			6,089,656				7,259,474
Non-controlling interest			(43,231	)			(10,477	)
Total equity			6,046,425				7,248,997
Total liabilities and equity		$	8,900,011			$	12,655,150

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

		For the Three Months Ended March 31,
		2015				2014
Revenues		$	1,575			$	13,791
Costs and expenses:
Cost of revenues			3,701				10,616
Impairment of oil and gas property			20,000				—
Selling, general and administrative			851,477				415,347
Total expenses			875,178				425,963
Gain on sale of real estate			971				—
Operating loss			(872,632	)			(412,172	)
Other income (expenses):
Interest and dividend income			4,299				4,707
Realized gains (losses) on the sale of trading securities, net			(119,202	)			12,555
Unrealized losses on trading securities, net			(174,538	)			(74,182	)
Interest expense			(22,535	)			(18,154	)
Other income			8,676				—
Total other expense			(303,300	)			(75,074	)
Loss before income tax			(1,175,932	)			(487,246	)
Income tax benefit			—				14,629
Net loss from continuing operations			(1,175,932	)			(472,617	)
Net loss from discontinued operations, net of income taxes			—				(260,896	)
Net loss			(1,175,932	)			(733,513	)
Net loss attributable to the non-controlling interest			32,754				25,195
Net loss attributable to American International Industries, Inc.		$	(1,143,178	)		$	(708,318	)
Basic and diluted loss per common share:
Loss from continuing operations		$	(0.47	)		$	(0.22	)
Loss from discontinued operations		$	—			$	(0.12	)
Weighted average common shares outstanding - basic and diluted			2,456,642				2,178,159
Comprehensive loss:
Net loss		$	(1,175,932	)		$	(733,513	)
Unrealized loss on marketable securities			(58,050	)			—
Total comprehensive loss			(1,233,982	)			(733,513	)
Comprehensive loss attributable to the non-controlling interests			32,754				25,195
Comprehensive loss attributable to American International Industries, Inc. shareholders		$	(1,201,228	)		$	(708,318	)

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

AMERICAN INTERNATIONAL INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Three Months Ended
		March 31,
		2015				2014
Cash flows from operating activities:
Net loss		$	(1,175,932	)		$	(733,513	)
Loss from discontinued operations			—				260,896
Loss from continuing operations			(1,175,932	)			(472,617	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,753				1,426
Impairment of oil and gas property			20,000				—
Stock-based compensation			38,400				91,320
Loss on sale of real estate			(971	)			—
Realized (gain) loss on the sale of trading securities, net			119,202				(12,555	)
Unrealized losses on trading securities, net			174,538				74,182
Change in operating assets and liabilities:
Accounts receivable			—				5,091
Prepaid expenses and other current assets			(3,988	)			—
Accounts payable – related parties			(141,786	)			(2,212	)
Accounts payable and accrued expenses			(190,655	)			61,018
Net cash used in operating activities from continuing operations			(1,159,439	)			(515,243	)
Net cash used in operating activities from discontinued operations			—				(88,663	)
Net cash used in operating activities			(1,159,439	)			(603,906	)
Cash flows from investing activities:
Purchase of trading securities			(305,590	)			(2,485,120	)
Sale of trading securities			9,332				2,385,037
Investment in oil and gas property			—				(20,000	)
Proceeds from sale of real estate held for sale			1,662,500				—
Proceeds from notes receivable			2,000,715				30,559
Net cash provided by (used in) investing activities from continuing operations			3,366,957				(89,524	)
Net cash provided by investing activities from discontinued operations			—				1,173,705
Net cash provided by investing activities			3,366,957				1,084,181
Cash flows from financing activities:
Principal payments on debt			(318,910	)			(3,319	)
Proceeds from issuance of debt			—				300,000
Proceeds from related party advances			37,786				—
Payments for acquisition of treasury stock			(6,990	)			(7,424	)
Net cash provided by (used in) financing activities from continuing operations			(288,114	)			289,257
Net cash used in financing activities from discontinued operations			—				(709,000	)
Net cash used in financing activities			(288,114	)			(419,743	)
Net increase in cash and cash equivalents			1,919,404				60,532
Cash and cash equivalents at beginning of period			373,482				670,372
Cash and cash equivalents at end of period		$	2,292,886			$	730,904
Supplemental cash flow information:
Interest paid		$	2,308			$	47,119
Income taxes paid		$	—			$	—
Non-cash investing and financing transactions:
Unrealized loss on marketable securities		$	58,050			$	—
Reclassification of promissory note to accounts payable and accrued liabilities		$	131,081			$	—
Cancellation of treasury stock		$	242,591			$	—
Write off of Inez acquisition payable		$	230,000			$	—
Contingent obligation		$	750,000			$	—
Contract obligation paid with restricted cash		$	71,133			$	—
Capitalized asset retirement costs		$	911			$	—

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

AMERICAN INTERNATIONAL INDUSTRIES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 - Summary of Significant Accounting Policies

 

The accompanying interim unaudited 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, 2014. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.

 

Organization, Ownership and Business

 

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

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of American and its wholly-owned subsidiaries American International Texas Properties, Inc. ("AITP"), American International Holdings Corp. (“AMIH”), formerly Delta Seaboard International, Inc. ("Delta"), in which American holds a 93.2% shareholder interest, and Brenham Oil & Gas Corp. (“BOG”), in which American holds a 51.0% interest. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Management's Estimates and Assumptions

 

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

 

Cash and Cash Equivalents

 

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

 

Notes Receivable

 

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

 

 

Investment Securities

 

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

 

Oil and Gas Properties, Full Cost Method

 

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

 

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

 

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

 

Ceiling Test

 

In applying the full cost method, BOG performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of oil and gas properties is compared to the “estimated present value” of its proved reserves, discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. There was no ceiling test write-down recorded during the three months ended March 31, 2015 and 2014.

 

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

 

Long-lived assets include:

 

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

 

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

 

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

 

 

Revenue Recognition 

 

Revenue is recognized when the earnings process is completed, the risks and rewards of ownership have transferred to the customer, which is generally the same day as delivery or shipment of the product, the price to the buyer is fixed or determinable, and collection is reasonably assured.

 

Income Taxes

 

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

 

American has adopted ASC 740-10 “Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740-10 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. As of March 31, 2015, American had not recorded any tax benefits from uncertain tax positions.

 

Net Loss Per Common Share

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of shares outstanding during a period. Diluted net loss per common share is computed by dividing the net loss, adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities. During the three months ended March 31, 2015 and 2014, the Company had no potential dilutive securities outstanding.

 

Advertising Costs

 

The cost of advertising is expensed as incurred. 

 

Stock-Based Compensation

 

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

 

Fair Value of Financial Instruments

 

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

 

Basis of Fair Value Measurement

 

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

 

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

 

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

 

American believes that the fair value of its financial instruments comprising cash, accounts receivable, notes receivable, accounts payable, and notes payable approximate their carrying amounts. The interest rates payable by American on its notes payable approximate market rates. The fair values of American's Level 1 financial assets, marketable securities - available for sale, are based on quoted market prices of the identical underlying security. As of March 31, 2015 and December 31, 2014, American did not have any significant Level 2 or 3 financial assets or liabilities. The following tables provide fair value measurement information for American's marketable securities - available for sale:

 

 

As of March 31, 2015
Fair Value Measurements Using:
		Carrying Amount				Total Fair Value				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial Assets:
Marketable Securities - available for sale		$	5,200			$	5,200			$	5,200			$	—			$	—
Marketable securities - trading		$	118,983			$	118,983			$	118,983			$	—			$	—

 

As of December 31, 2014
Fair Value Measurements Using:
		Carrying Amount				Total Fair Value				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial Assets:
Marketable Securities - available for sale		$	63,250			$	63,250			$	63,250			$	—			$	—

 

Subsequent Events

 

American has evaluated all transactions from March 31, 2015 through the financial statement issuance date for subsequent event disclosure consideration.

 

Reclassifications

 

Certain balances from the prior period have been reclassified to conform to the current period presentation.

 

New Accounting Pronouncements

 

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

 

Note 2 - Concentrations of Credit Risk

 

American maintains its cash and certificates of deposit in commercial accounts at major financial institutions. The FDIC no longer has limits on non-interest bearing accounts. American has not incurred losses related to these deposits.

 

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

 

Trading securities - represents investments in equity securities primarily include shares of common stock in various companies that are bought and held principally for the purpose of selling them in the near term with the objective of generating profits on short-term differences in price. Any unrealized changes in market values are recognized in the consolidated statements of operations. 

 

During the three months ended March 31, 2015 and 2014, American had net unrealized trading losses of $174,538 and $74,182, respectively, related to securities held on those dates. American recorded net realized losses of $119,202 and net realized gains of $12,555 during the three months ended March 31, 2015 and 2014, respectively.

 

 

Marketable securities - available for sale - any unrealized changes in market values are recognized as other comprehensive loss. At March 31, 2015, this investment was valued at $5,200, based on the closing market price of $0.40 American recognized other comprehensive losses of $58,050 and $0 during the three months ended March 31, 2015 and 2014, respectively, for the unrealized changes in market values for this investment.

 

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

 

Note 4 - Notes Receivable

 

Note receivables consist of the following at March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31, 2014
Unsecured note receivable for sale of a former subsidiary, Marald, Inc., due in monthly payments of $3,074, including interest at 4%, beginning July 1, 2012 through June 1, 2022 (a)		$	281,073			$	281,073
First lien note receivable due in monthly payments of $8,333, including interest at 5%, principal due on or before August 25, 2016 (b)			—				2,000,000
Unsecured note receivable due in monthly payments of $5,000, including interest at 3%, principal due on or before April 1, 2018 (c)			569,478				570,193
Total notes receivable			850,551				2,851,266
Reserve due to uncertainty of collectability			(19,523	)			(19,523	)
Subtotal			831,028				2,831,743
Less: current portion			(60,000	)			(2,346,053	)
Long-term notes receivable		$	771,028			$	485,690

 

(a)

Sale of Marald, Inc., principal and interest due monthly through June 1, 2022. The original note was for $300,000 and was discounted to $200,000 for the receipt of full payment on or before October 25, 2007. In July 2012, payments began under a new extension and renewal agreement for the note balance plus accrued interest, with the payment terms indicated above. Since April 2013, no payments have been received on this note. American has filed a lawsuit for the total amount owed plus interest and attorney’s fees. The Company believes this receivable is fully collectible, but has classified the receivable as long-term at March 31, 2015 and December 31, 2014.

(b)

First lien note receivable due August 25, 2016. AITP sold its 174 acres in Waller County, Texas, which closed on July, 25, 2014. In connection with the close, the Company entered into a promissory note receivable with the purchaser of the aforementioned property for $2,000,000. This receivable was paid in full in January 2015.

(c)

Unsecured note receivable due April 1, 2018. This note was issued for $601,300. This note was previously owed by Southwest Gulf Coast Properties, Inc. ("SWGCP") resulting from closing costs, principal and interest paid by American on the SWGCP loan at TXCB. In February, SWGCP obtained a judgment against Kentner Shell ("Shell"), who personally guaranteed the note, for $4,193,566 for matters related to these condominiums. On September 30, 2011, SWGCP assigned all of its interests in this judgment to American in exchange for this note and $10. On April 1, 2013, American and Shell executed a $620,000 note agreement whereby Shell will make monthly payments in the amount of $5,000, beginning May 1, 2013, with a balloon payment for the remaining amount owed due on or before April 1, 2018.

 

 

At March 31, 2015 and December 31, 2014, American had reserved a total of $19,523 on all notes receivable in the aggregate due to uncertainty of collectability. American believes this reserve remains appropriate at March 31, 2015.

 

Interest income on notes receivable is recognized principally by the simple interest method. During the three months ended March 31, 2015 and 2014, American recognized interest income of $299 and $4,707, respectively, on the notes receivable.

 

Note 5 - Real Estate Held for Sale

 

Real estate held for sale consisted of the following: 

 

		March 31, 2015				December 31, 2014
65 acres in Galveston County, Texas		$	520,382			$	520,382
1.705 acres in Galveston County, Texas			460,000				460,000
Dawn Condominium units on the waterfront in Galveston, Texas; 6 and 7 units as of September 30, 2014 and December 31, 2013, respectively			788,033				788,033
96 acres – vacant commercial use land in Galveston County, Texas			1,211,000				1,211,000
22 acres – vacant mixed use land in Houston, Texas (a)			—				1,661,656
31 acres – vacant mixed use land in Houston, Texas			1,772,564				1,772,564
		$	4,751,979			$	6,413,635

 

(a) 22 acres- vacant mixed use land in Houston,, Texas – During the three months ended March 31, 2015, the Company sold 22 acres of vacant mixed use land for gross proceeds of $1,750,000 to a third party and recorded a $971 gain. The sale of the real estate triggered a clause in a previously executed agreement pursuant to which $750,000 of the sale proceeds was placed into an escrow account to serve as collateral for an agreement between a previously owned subsidiary (NPI) and a third party. As a result, $750,000 of the sale proceeds were placed in an escrow account to serve as a guarantee under the agreement. During the three months ended March 31, 2015, the escrow account paid $71,133 in expenses which reduced the escrow account balance to $678,867.

 

 

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

 

1)

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

2)

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

3)

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

4)

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

5)

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

6)

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

 

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

 

Note 6 - Oil and Gas Properties

 

Brenham uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells, including directly related overhead costs and related asset retirement costs are capitalized. Properties not subject to amortization consist of exploration and development costs that are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved, or their values become impaired and the corresponding costs are added to the capitalized costs subject to amortization. During the three months ended March 31, 2015, depletion of oil and gas properties of $189 was recorded. During the three months ended March 31, 2014, depletion of oil and gas properties of $821 was recorded. Costs of oil and gas properties are amortized using the units of production method. Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool, and generally, no gain or loss is recognized.

 

In applying the full cost method, Brenham performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of oil and gas properties is compared to the “estimated present value” of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. During the three months ended March 31, 2015 and 2014, impairment of oil and gas properties of $20,000 and $0 was recorded, respectively.

 

 

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

 

		March 31, 2015				December 31, 2014
Royalty interest in 24 acres in Washington County, Texas		$	—			$	—
Royalty interest in 700 acres in the Permian Basin			8,400				8,400
10% working interest in the Pierce Junction Field			87,500				87,500
Lease of 394 acres in the Gillock Field			83,500				83,500
Lease of 332 acres in Inez Prospect (a)			—				250,000
Capitalized asset retirement costs			4,710				4,003
Total oil and gas properties			184,110				433,403
Accumulated depletion			(4,151	)			(3,962	)
Net capitalized costs		$	179,959			$	429,441

 

a)     Lease of 332 acres in the Inez Prospect - On January 8, 2014, the Company entered into a letter of intent with a third party to acquire a 332-acre oil and gas lease, the “Inez Prospect,” located in Victoria County, Texas, and the #1 Roberts Unit well-bore, and all the down-hole equipment and surface equipment associated therewith. On April 10, 2014, the Company and the third party entered into a prospect and lease acquisition agreement. Pursuant to the agreement, the Company agreed to acquire 100% of the working interest for a total purchase price of $250,000, consisting of a $20,000 deposit, which was paid during the year ended December 31, 2014, and a payment of the remaining $230,000 prior to the beginning of any exploration which is recorded in accounts payable and accrued expenses at December 31, 2014. The Company wrote the asset and related liabilities off in full during the quarter ended March 31, 2015 as the Company determined the asset was fully impaired.

 

 

Note 7 - Property and Equipment

 

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

 

		Years				March 31, 2015				December 31, 2014
Building and improvements			20			$	38,975			$	38,975
Machinery and equipment			7-15				—				2,035
Office equipment and furniture			7				103,501				101,467
Total							142,476				142,477
Less accumulated depreciation							(117,504	)			(117,062	)
Net property and equipment						$	24,972			$	25,415

 

Depreciation expense during the three months ended March 31, 2015 and 2014 was $443 and $7,871, respectively.

 

Note 8 - Debt

 

Debt consisted of the following:

 

		March 31, 2015				December 31, 2014
Note payable to a bank, due in monthly installments, including interest at 7.25% with a principal balance due on February 22, 2019, secured by real property. This note payable was paid in full in March 2015.		$	—			$	317,027
Note payable to a bank, due in monthly installments, with interest at 12.5%, with a principal balance due in February 2017, secured by the Company’s real property. Daniel Dror, Chairman and CEO of American, is a personal guarantor of this note payable. (a)			226,783				229,960
Note payable, non-interest bearing, which was issued in exchange for shares to be purchased by the Company, secured by 63,540 shares of the Company not delivered as of March 31, 2014, the Company has entered into an escrow agreement to resolve payment of this amount (b)			—				131,081
Note payable to a bank, due in monthly installments, with interest at 12.5%, with a principal balance due in June 30, 2017, secured by the Company’s real property. Daniel Dror, Chairman and CEO of American, is a personal guarantor of this note payable.			150,000				149,201
Subtotal			376,783				827 ,269
Less current portion			(18,000	)			(372,983	)
Total		$	358,783			$	454,286

 

  

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

 

(b) On April 24, 2015, The Company settled American International Industries, Inc. and Daniel Dror v. Scott and Maria Wolinsky. The Company agreed to pay the Wolinsky’s $155,461 for delivery of 17,940 of the Company’s shares to settle the lawsuit in full. In connection with settlement, the Company recorded an additional $24,380 obligation in connection with this settlement agreement and reclassified the $131,081 promissory note to accrued liabilities as of March 31, 2015. The $155,461 obligation was paid in full in April 2015.

 

Note 9 - Commitments and Contingencies

 

Legal

 

American International Industries, Inc. v. Juan Carlos Martinez. In 2002 American acquired 100% of Marald, Inc. from Juan Carlos Martinez. Mr. Martinez continued as an employee and President of Marald. A few months after the acquisition date, Mr. Martinez notified American that he would resign and demanded that Marald be sold back to him. American sold Marald to Mr. Martinez for $225,000 and two 10 year promissory notes for $300,000. In October 2007, no payments had been made, causing the notes to go into default. In May 2010, American agreed to cancel the notes in exchange for a new $300,000 personal note with Mr. Martinez. During 2013, the note entered into default status due to non-payment. Under the terms of the note, American accelerated the maturity with the entire unpaid principal balance plus all interest at a default rate of 18% is immediately due and payable. American has filed a lawsuit for the total amount owed plus interest and attorney’s fees. The Company believes this $281,073 receivable is fully collectible, but has classified the receivable as long-term at March 31, 2015 and December 31, 2014.

 

American International Industries, Inc. and Daniel Dror v. Scott and Maria Wolinsky. On October 1, 2013, American entered into a stock purchase agreement with Scott Wolinsky, a former director of American, and Maria Wolinsky, whereby American purchased the Wolinskys’ 89,540 shares of American’s common stock for cash of $130,000 and a non-interest bearing promissory note of $200,000 (the “Note”), partially secured by American shares of common stock and by the guarantee of Daniel Dror, American’s Chief Executive Officer. A related treasury stock obligation in the amount of $200,000 was recorded. During 2014, the Company and the Wolinsky’s pursued litigation in connection with settling these obligations.

 

As of December 31, 2014, the Company owed Scott Wolinsky $131,081 pursuant to the promissory note. On April 24, 2015, The Company settled American International Industries, Inc. and Daniel Dror v. Scott and Maria Wolinsky. The Company agreed to pay the Wolinsky’s $155,461 for delivery of 17,940 of the Company’s shares. For the consideration given, both parties were released from any and all claims related to this matter. The Company recorded the $24,380 settlement obligation and reclassified the aggregate $155,461 obligation to accrued liabilities as of March 31, 2015. The Company paid the obligation in full in April 2015.

 

Guarantee Liability

 

During the year ending December 31, 2014, the Company’s subsidiary, NPI, entered into a revolving line of credit agreement secured by the assets of NPI and guaranteed by Daniel Dror and the Company. The balance owed by NPI under this line of credit was $1,512,542 as of December 31, 2014. The Company sold NPI during the three months ended March 31, 2015. The buyer of NPI has informed the Company that the Company’s obligation for this guarantee is $570,095 which the Company has recorded in accounts payable and accrued expenses.

 

Each of American's subsidiaries that have outstanding notes payable has secured such notes by that subsidiary’s property and equipment and is guaranteed by American.

  

 

Note 10 - Capital Stock and Stock Options

 

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

 

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

 

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

 

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

 

During the three months ended March 31, 2015, American and its subsidiaries issued the following shares as stock-based compensation:

 

American issued 20,000 shares of common stock valued at $17,000 for legal fees.

 

American issued 5,000 shares of common stock valued at $4,200 for legal fees.

 

American issued 10,000 shares of common stock valued at $8,600 for director fees.

 

American issued 10,000 shares of common stock valued at $8,600 for director fees.

 

American repurchased 6,607 shares of common stock for $6,990 from third parties.

 

American repurchased and canceled 242,590 treasury shares canceling $243 of common stock and $242,347 of additional paid-in capital.

 

During the three months ended March 31, 2014, American and its subsidiaries issued the following shares as stock-based compensation:

 

American issued 10,000 shares of common stock valued at $17,900 to its CEO as a bonus and for being the personal guarantor on Company loans.

 

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

 

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

 

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

 

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

 

 

Note 11 - Related Parties

 

As of March 31, 2015 and December 31, 2014, the Company owed related parties $131,124 and $235,124, respectively.

 

As of March 31, 2015 and December 31, 2014, the Company owes Daniel Dror II $300,000 in connection with real estate acquired in 2014.

 

Note 12 - Sale of Discontinued Operations

 

During the fourth quarter of 2014, the Company determined that it would cease all operations and sell its subsidiary, NPI. During the three months ended March 31, 2015, the Company completed the sale of NPI to Realamerica Corporation (“RC), a related party. RC paid the Company $10 for 100% of the shares of NPI.

 

The summarized operating results for discontinued operations is as follows:

 

		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
Revenues		$	—			$	1,187,773
Cost of revenues			—				(911,589	)
Selling, general and administrative			—				(490,268	)
Impairment of assets			—				—
Total costs and expenses			—				(7,434,225	)
Operating loss			—				(326,493	)
Other income (expenses):
Interest income			—				—
Interest expense			—				(38,463	)
Income tax expense			—				(1,374	)
Other expense			—				(6,975	)
Total other expenses			—				(46,812	)
Loss from discontinued operations		$	—			$	(260,896	)

  

Summary of assets and liabilities of discontinued operations is as follows:

 

		March 31, 2015				December 31, 2014
Current assets
Cash and cash equivalents		$	—			$	52,295
Accounts receivable, net			—				531,604
Inventories, net			—				1,473,363
Other current assets			—				39,579
Total current assets of discontinued operations		$	—			$	2,096,841
Non-current assets
Property and equipment, net		$	—			$	10,113
Patents, trademarks and tooling, net			—				144,283
Goodwill			—				254,798
Total non-current assets of discontinued operations		$	—			$	409,194
Current liabilities
Accounts payable and accrued expenses		$	—			$	492,395
Total current liabilities of discontinued operations		$	—			$	492,395
Long-term liabilities
Long-term debt		$	—			$	1,512,542
Deferred revenue			—				464,798
Other			—				36,300
Total long-term liabilities of discontinued operations		$	—			$	2,013,640

 

 Note 13 - Segment Information

 

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

 

American International Holdings Corp. (“AMIH”) - a 93.2% owned subsidiary, is a non-operating company.

 

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

 

 

Brenham Oil & Gas ("BOG") - a 51.0% owned subsidiary that currently owns oil and gas properties. Through BOG, American is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves. The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa.

 

Corporate overhead - American's investment holdings including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses. 

 

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

 

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

 

		For the Three Months Ended March 31,
		2015				2014
Revenues:
Brenham Oil & Gas		$	1,575			$	10,421
AITP			—				3,370
Total revenues		$	1,575			$	13,791
Operating income (loss) from continuing operations:
AMIH		$	—			$	(25,389	)
Brenham Oil & Gas			(62,985	)			(37,744	)
AITP			19,711				(50,085	)
Corporate			(832,358	)			(298,954	)

 

Operating loss from continuing operations			(872,632	)			(412,172	)
Other expense from continuing operations			(300,300	)			(75,074	)
Net loss from continuing operations		$	(1,175,932	)		$	(487,246	)

 

		For the Three Months Ended March 31,
		2015				2014
Interest Expense:
AITP		$	21,244			$	3,125
Corporate			1,291				15,029
Total interest expense		$	22,535			$	18,154

 

		March 31, 2015				December 31, 2014
Identifiable Assets:
AMIH		$	305			$	120
Brenham Oil & Gas			186,422				435,441
AITP			7,755,877				8,127,326
Corporate			7				1,586,228
Total identifiable assets		$	8,900,011			$	10,149,115

 

Note 14 - Subsequent Events

 

On April 24, 2015, The Company settled American International Industries, Inc. and Daniel Dror v. Scott and Maria Wolinsky. The Company agreed to pay the Wolinsky’s $155,461 for delivery of 17,940 of the Company’s own shares to settle the lawsuit in full. The Company recorded an additional $24,380 obligation in connection with this settlement agreement and reclassified the $155,461 obligation in aggregate to accrued liabilities as of March 31, 2015. The $155,461 obligation was paid in full in April 2015.

 

 

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:

 

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

 

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

 

Brenham Oil & Gas ("BOG") - a 51.0% owned subsidiary that currently owns oil and gas properties. Through Brenham Oil & Gas, American is engaged in negotiations with financial institutions for the purpose of financing potential acquisitions of existing oil and gas properties and reserves. The Company is seeking to acquire a portfolio of oil and gas assets in North America and West Africa and large oil concessions in West Africa.

 

Disposal of Business Unit

 

Northeastern Plastics, Inc. (NPI), a Texas corporation, was a wholly-owned subsidiary of the Company. NPI was a supplier of products to retailers and wholesalers in the automotive after-market and in the consumer durable electrical products markets. NPI was located at 14221 Eastex Freeway, Houston, Texas 77032.

 

In the fourth quarter of 2014, the Company determined that it would cease all operations and sell its subsidiary, NPI. As a result, the Company has identified the assets and liabilities of the NPI subsidiary as assets and liabilities held for sale at December 31, 2014. Results of operations for NPI have been segregated and presented as discontinued operations for the period ended March 31, 2014 for comparative purposes.

 

Products and Services

 

NPI's diversified products were sold in the automotive and consumer retail and after-market channels. NPI marketed its diversified product assortment under the Good Choice® and MOTOR TREND® brand names.

 

 

The NPI MOTOR TREND® branded products included a variety of booster cables, portable and rechargeable hand lamps, lighting products, cord sets, and miscellaneous battery and other consumer automotive accessories. The NPI MOTOR TREND® program was supported through a national advertising campaign in MOTOR TREND® magazine and additional brand advertising through MOTOR TREND® Radio and MOTOR TREND® TV. 

 

The NPI Good Choice® branded product assortment not only matches in depth but exceeds the NPI MOTOR TREND® branded product assortment. In addition, the vast majority of the Good Choice® product line has been tested at the Good Housekeeping Institute and prominently carries the Good Housekeeping "Seal" on many of its products. The NPI Good Choice® product assortment includes a variety of portable lighting products, cord sets, residential household light bulbs, night lights, multiple outlet devices and other consumer products.

 

NPI products were available at stores such as Family Dollar, Dollar Tree, Ocean State Jobbers, Auto Zone, Bi-Mart, and Straus Auto, among others.

 

Virtually all of NPI's products were manufactured overseas.

 

Our Properties

 

Brenham holds oil and gas leases interests in Texas.

 

Victoria County, Texas

 

On January 16, 2014, Brenham acquired a 332-acre oil and gas lease, the "Inez Field Prospect," located in Victoria County, Texas. Exploration has not yet commenced, and the property is in the process of being sold. However, there can be no assurance that a sale will take place. Further, Brenham acquired #1 Roberts Unit well-bore, as well as all the equipment down-hole and surface equipment associated therewith. Brenham acquired 100% of the working interest and a net revenue interest of 74%. In January 1990, Ken Petroleum Corporation drilled and completed the #1 Roberts Unit in the Inez (8,600') Field in Victoria County, Texas. The well was initially completed in the Yegua "B" between 8498-8510' and flowed 2,668 MCFGPD on an 8/64" choke. In February 1990, Stuart Petroleum Testers performed a Full Scale Separator Test, and it was determined that the Roberts well had a potential of 9,000 MCFGPD and 65.14 barrels of 48° API condensate during the 4-point test. The well later encountered mechanical problems and has since been shut-in.

 

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

 

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

 

In January 2015, the Company elected not to pursue this opportunity and allowed the option agreement to expire.

 

 

Pierce Junction Field - Houston, Texas

 

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

 

Gillock Field - Galveston County, Texas

 

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

 

Washington County, Texas

 

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

 

Refer to the tables related to proved oil and gas reserves, together with the changes therein, proved developed reserves, and proved undeveloped reserves for the years ended December 31, 2014 and 2013 in the audited consolidated financial statements and notes thereto contained in Brenham’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2014.

 

Corporate overhead - American's investment holdings including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional businesses.

 

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

 

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

 

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

 

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

  

 

Results of Operations

 

Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014

 

The following is derived from, and should be read in conjunction with, our unaudited consolidated financial statements, and related notes for the three months ended March 31, 2015 and 2014.

 

Net revenues. Revenues from continuing operations were $1,575 for the three months ended March 31, 2015, compared to $13,791 for the three months ended March 31, 2014, representing a decrease of $12,216, or 89%. For the three months ended March 31, 2015 and 2014, Brenham's revenues were $1,575 and $10,421, respectively. For the three months ended March 31, 2015 and 2014, AITP's revenues were $0 and $3,370, respectively.

 

Selling, general and administrative. Consolidated selling, general and administrative expenses for the three months ended March 31, 2015 were $875,178, compared to $415,347 for the period ended March 31, 2014, representing an increase of $459,831, or 111%. General and administrative expenses for the three months ended March 31, 2015 increased from the same period in the prior year primarily due to costs associated with its contingent obligation.

 

Gain (loss) from sale of assets. We had a gain on sale of real estate of $971 for the three months ended March 31, 2015, compared to $0 for the three months ended March 31, 2014.

 

Loss from operations. We had an operating loss of $872,632 for the three months ended March 31, 2015, compared to an operating loss of $412,172 for the three months ended March 31, 2014, which represented an increase of $460,460, due to the aforementioned activities.

 

Total other income (expense). Total other expenses were $303,300 for the three months ended March 31, 2015, compared total other expenses of $75,074 for the three months ended March 31, 2014. Other expenses for the three months ended March 31, 2015 included non-cash unrealized losses on trading securities of $218,288, compared to $74,182 for the three months ended March 31, 2014. Realized losses on trading securities for the three months ended March 31, 2015 were $119,202, compared to gains of $12,555 for the three months ended March 31, 2014. Interest expense was $22,535 during the three-month period ended March 31, 2015, compared to $18,154 during the same period in the prior year.

 

Net loss. We had a net loss attributable to the Company of $1,1,43,178, or $0.47 per share, for the three months ended March 31, 2015, compared to a net loss of $708,318, or $0.33 per share, for the three months ended March 31, 2014. 

 

  

Liquidity and Capital Resources

 

Liquidity is our ability to generate sufficient cash flows to meet the Company’s obligations and commitments, or obtain appropriate financing. Currently, our liquidity needs arise primarily from working capital requirements, debt service on indebtedness, and capital expenditures. We have funded these liquidity requirements from debt financing and proceeds from notes receivable.

 

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

 

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

 

At March 31, 2015, the consolidated working capital was $5,725,875. We had consolidated current assets and current liabilities of $7,914,846 and $2,232,971, respectively at March 31, 2015.

 

Cash flow from operating activities. Net cash used in operating activities was $1,159,439 for the three months ended March 31, 2015, compared to $515,243 for the three months ended March 31, 2014. Net cash used in operating activities for the three months ended March 31, 2015 was derived primarily from our net loss from operations of $1,175,932. Net cash used in operating activities for the three months ended March 31, 2014 was principally derived from our net loss from continuing operations of $472,617.

 

Cash flow from investing activities. For the three months ended March 31, 2015, our investing activities provided cash of $3,366,957 primarily as a result of proceeds from sale of real estate of $1,662,500 and proceeds from notes receivable of $2,000,715. For the three months ended March 31, 2014, our investing activities used cash of $89,524.

 

Cash flow from financing activities. Our financing activities used cash of $288,114 during the three months ended March 31, 2015, primarily due to principal payments of debt of $318,910. For the three months ended March 31, 2014, our financing activities provided cash of $289,257, primarily as a result of proceeds from the issuance of debt of $300,000.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2015, we did not have any off-balance sheet arrangements.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Not applicable.

 

ITEM 4T. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures. Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of March 31, 2015 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2015. Such conclusion reflects the 2013 departure of our chief financial officer and assumption of duties of principal financial officer by an interim chief financial officer and the resulting lack of accounting expertise of our now principal financial officer and a lack of segregation of duties. Until we are able to remedy these material weaknesses, we are relying on third party consultants and our accounting firm to assist with financial reporting.

 

Changes in internal controls. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended March 31, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from Risk Factors as previously disclosed in the Registrant’s annual report for the year ended December 31, 2014.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

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

 

Exhibit No.		Description
31.1		Certification of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002
31.2		Certification of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002
32.1		Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2		Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

SIGNATURES

 

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

 

/s/ Daniel Dror
CEO and Chairman
Dated: August 10, 2015
/s/ Charles R. Zeller
Interim CFO and Director
Dated: August 10, 2015

 

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