Summary of AMERICAN INTERNATIONAL INDUSTRIES INC

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" 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, TX 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. The Company is sometimes referred to as "we", "us", "our", and other such phrases as provided in Regulation F-D (Fair Disclosure).

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

· Northeastern Plastics (NPI) - a wholly-owned subsidiary, is a supplier of automotive after-market products and consumer durable goods products to retailers and wholesalers in the automotive after-market and in the consumer durable electrical products markets;
· Shumate Energy Technologies, Inc. (SET) - a wholly-owned subsidiary, manufactures highly specialized equipment for energy industry customers, including expandable tubing technology products that are used in field service operations for oil and gas exploration under extreme environmental conditions. SET manufactures large-diameter products and close tolerance machined parts that range up to thirty-four feet in length using state of the art, large part CNC equipment.
· Delta Seaboard Well Services (Delta) - a 51% owned subsidiary, is an onshore rig-based well-servicing contracting company providing services to the oil and gas industry;
· Corporate overhead - the Company'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 the Company's balance sheet at $0. Through Brenham Oil & Gas, 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 enter into arrangements with third-party owners and potential partners with proven oil and gas reserves, but who lack the financial resources and/or the technical expertise possessed by the Company, to assist them with the resources required to develop their reserves.

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.

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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.

On December 31, 2008, the board of directors of the Company approved the deconsolidation of Hammonds Industries, Inc. ("Hammonds") from the Company. To effect the deconsolidation of Hammonds, the Company was required to reduce its ownership percentage, board membership, and guarantee of Hammonds' debt. After the distribution of the special dividend of approximately 17.4 million shares of Hammonds' common stock to the Company's shareholders of record on December 31, 2008, the Company's ownership is proximately 13% of Hammonds' issued and outstanding common stock. Effective December 31, 2008, Carl Hammonds was appointed Chairman and CEO and John Stump, III was appointed CFO. Hammonds accepted the resignations of Daniel Dror, as Chairman of the Board and CEO, Sherry L. Couturier, as Director, CFO and Vice President, and Charles R. Zeller, as Director, and appointed Richard C. Richardson as a new board member unrelated to the Company. As a result, the majority of Hammonds' board of directors is no longer controlled by the Company. Additionally, a reduction of the Company's guarantee of Hammonds' debt was obtained from Texas Community Bank.

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 Six Months Ended June 30, 2009 Compared to Three and Six Months Ended June 30, 2008.

The following is derived from, and should be read in conjunction with, our unaudited consolidated financial statements, and related notes for the three and six months ended June 30, 2009 and 2008.

Net revenues. For the three months ended June 30, 2009, revenues from continuing operations were $6,232,115, compared to $7,075,290 for the three months ended June 30, 2008, representing a decrease of $843,175, or 11.9%. Revenues from continuing operations were $12,427,129 for the six months ended June 30, 2009, compared to $10,586,195 for the six months ended June 30, 2008, representing an increase of $1,840,934, or 17.4%.

Delta reported revenues of $2,331,214 for the three months ended June 30, 2009, compared to $5,169,849 for the same period in 2008, representing a decrease of $2,838,635, or 54.9%. For the six months ended June 30, 2009, Delta's revenues were $4,795,125, compared to $7,252,798 for the six months ended June 30, 2008, representing a decrease of $2,457,673, or 33.9%. The decrease in revenues at Delta is due to a decrease in pipe sales for the three and six months of $2,776,769 and $3,102,223, respectively, to the oil field service industry. Pipe sales revenues have decreased due to a decline in drilling activity creating a decline in demand for pipe. Rig service revenues for the three and six months increased by $319,096 and $263,588, respectively, due to the addition of a new rig.

The results of SET for the three and six months ended June 30, 2009 are included in our results of operations. For the three and six months ended June 30, 2009, SET's revenues were $1,907,496 and $3,994,317, respectively, and net operating income was $75,995 and $240,276, respectively.

Revenues at NPI during the three months ended June 30, 2009 were $1,993,405, compared to $1,905,441 for the three months ended June 30, 2008, representing an increase of $87,964, or 4.6%. NPI's revenues were $3,637,687 for the six months ended June 30, 2009, compared to $3,333,397 for the six months ended June 30, 2008, representing an increase of $304,290, or 9.1%. NPI's strategic plan for 2009 includes targeting three or more additional large accounts and reducing its dependence upon major customers by adding more mid-size accounts. During the second quarter of 2009, NPI added two large accounts and began making shipments to these customers. NPI is highly reliant upon a small customer base, with approximately 53% of its sales being generated through one principal customer. There is significant risk in having such a large portion of revenues concentrated to this extent and the loss of one or more principal customers could result in a reduction in NPI's revenues. The sales of NPI have historically been subject to sharp seasonal variations.

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Income / loss from operations. Our operating loss for the three months ended June 30, 2009 was $519,023, compared to operating income of $366,705 for the three months ended June 30, 2008. Our operating loss for the six months ended June 30, 2009 was $971,097, compared to the operating loss of $1,060,139 for the six months ended June 30, 2008. For the six months ended June 30, 2009, selling, general and administration costs increased as a percentage of revenues to 64.3%, compared to 60.5% for the same period in 2008. Additionally, margins declined from 56.5% for the six months ended June 30, 2009, compared to 50.5% for the same period in 2008, primarily due to the decline in pipe sales at Delta. The margins on pipe sales are historically greater than the margins on our other revenue components.

Total other income/expenses. Other expense was $113,564 for the three months ended June 30, 2009, compared to other income of $108,654 for the three months ended June 30, 2008. Other income was $8,286 for the six months ended June 30, 2009, compared to other expense of $1,080,865 for the six months ended June 30, 2008. Net realized/unrealized gains on trading securities were $35,771 for the three months ended June 30, 2009, compared to net losses of $1,250,565 for the three months ended June 30, 2008. Net realized/unrealized gains on trading securities were $49,643 for the six months ended June 30, 2009, compared to net losses of $2,582,531 for the six months ended June 30, 2008. The net unrealized losses on trading securities of $2,582,531 for the six months ended June 30, 2008, were due primarily to the decline in the market value of our investment in Rubicon Financial Incorporated of $2,050,000 (see note 2). Other expense for the three and six months ended June 30, 2008 included $2,945,133 for recognition of the property dividend distribution gain associated with the declaration of the Hammonds' stock dividend (see note 19) and the recognition of $1,450,000 for the Delta lawsuit settlement (see note 17). After minority interest, the net impact of this settlement on the Company's net income was $739,500. For the six months ended June 30, 2009, American recognized other income in the amount of $198,347, of which $175,000 was for providing right-of-way access on the 287 acres in Galveston County. Interest expense was $482,279 for the six months ended June 30, 2009, compared to $410,492 for the six months ended June 30, 2008. The increase in interest expense was due primarily to the $5 million in debt used to fund the acquisition of the assets of Shumate Machine Works.

Net loss. We had a net loss from continuing operations of $645,133, or $0.08 per share, for the three months ended June 30, 2009, compared to net income of $563,931, or $0.08 per share, for the same period in 2008. We had a net loss from discontinued operations of $350,000, or $0.04 per share, for the three months ended June 30, 2009, compared to net a net loss of $678,050, or $0.10 per share, for the same period in 2008. Our net loss was $852,248, or $0.10 per share, for the three months ended June 30, 2009, compared to net income of $176,265, or $0.02 per share, for the three months ended June 30, 2008. We had a net loss from continuing operations of $988,041, or $0.11 per share, for the six months ended June 30, 2009, compared to a net loss of $2,066,564, or $0.29 per share, for the same period in 2008. We had a net loss from discontinued operations of $350,000, or $0.04 per share, for the six months ended June 30, 2009, compared to net a net loss of $1,476,609, or $0.21 per share, for the same period in 2008. Our net loss was $1,045,387, or $0.12 per share, for the six months ended June 30, 2009, compared to a net loss of $3,004,547, or $0.42 per share, for the six months ended June 30, 2008.

Liquidity and Capital Resources

Total assets/working capital. Total assets at June 30, 2009 were $33,673,622, compared to $35,977,944 at December 31, 2008, representing a decrease of $2,304,322. The primary reason for the decrease in total assets resulted from the use of cash and the redemption of certificates of deposit to reduce our debt by $1,695,306 and to pay for operating expenses. At June 30, 2009, our working capital surplus was $17,266,140, compared to a working capital surplus of $18,196,027 at December 31, 2008, representing a decrease in working capital of $929,887.

Cash flow from operations. For the six months ended June 30, 2009, cash flow used in operations was $4,200, compared to cash flow used in operations of $2,614,041 during the same period in 2008. Our net loss of $988,041 for the six months ended June 30, 2009 included non-cash expenses of $632,735, including depreciation and amortization of $591,485 and share-based compensation of $41,250. Our net loss of $2,066,564 for the six months ended June 30, 2008 included non-cash income of $2,945,133 for recognition of the property dividend distribution gain associated with the declaration of the Hammonds' stock dividend (see note 19) and non-cash expenses of $4,594,693, including unrealized losses on trading securities of $2,653,670, recognition of $1,450,000 for the Delta lawsuit settlement (see note 17), depreciation and amortization of $237,399, share-based compensation of $253,624. Our inventories increased by $797,874 for the six months ended June 30, 2009, compared to an increase of $464,076 during the six months ended June 30, 2008. We decreased our investments in trading securities by $124,148 during the six months ended June 30, 2009, compared to an increase of $95,289 during the same period in 2008. Accounts receivable decreased by $564,466 during the six months ended June 30, 2009, compared to an increase of $563,564 during the same period in 2008. Prepaid expenses increased by $188,401, other assets decreased by $38,830, and accounts payable increased by $659,580 for the six months ended June 30, 2009. For the six months ended June 30, 2008, prepaid expenses increased by $1,196,578, other assets decreased by $9,861, and accounts payable increased by $241,337.

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Cash flow from investing activities. Our investing activities provided cash of $964,076 during the six month period ended June 30, 2009, as a result of a net decrease in investments in certificates of deposit of $1,550,000, offset by the issuance of a note receivable of $300,000, loans to related parties of $221,939, and purchases of property and equipment of $133,821. This is compared to cash provided by investing activities during the same period in the prior year in the amount of $44,782, as a result of a net decrease in investments in certificates of deposit of $184,579 and proceeds from the sale of drilling rig equipment of $200,000, offset by the issuance of a note for $225,000 and the purchase of property and equipment of $142,194.

Cash flow from financing activities. During the six months ended June 30, 2009, our financing activities used cash of $1,667,112 compared to cash provided of $2,529,498 during the same period in 2008. During the six month period ended June 30, 2009, we made payments of $1,695,306 on debt and purchased 211,746 shares of treasury stock at a cost of $192,675. During the 2008 period, we received net proceeds from the issuance of debt of $2,117,663 and from line-of-credit agreements of $1,427,000. We made payments of $760,175 on debt and margin loans during the six month period ended June 30, 2008.

Real estate. During the fourth quarter of 2008, American received a 1.705 acre tract of land in Galveston County appraised at $540,000 as a guarantor's fee. In connection with this fee, American has pledged $1,750,000 in certificates of deposit for a $4,000,000 loan to Dawn Condominiums L.P. at Texas Community Bank. As the principal of the loan is reduced, the bank will release portions of the pledged certificates of deposit until the loan is paid in full. 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 continues to own 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 CBRE on an exclusive basis to sell the property for an increased listing price of $25,000,000.