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10-Q 1 delta_financials.htm DELTA SEABOARD 10Q 09302011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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

For the transition period from to

Commission file number: 0-50912

DELTA SEABOARD INTERNATIONAL, INC.

(Exact Name Of Registrant As Specified In Its Charter)

Texas	88-0225318
(State of Incorporation)	(I.R.S. Employer Identification No.)

601 Cien Street, Suite 235 Kemah, TX	77565-3077
(Address of Principal Executive Offices)	(ZIP Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x

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

The number of shares outstanding of each of the issuer’s classes of equity as of November 14, 2011 is 70,892,250 shares of common stock and 3,769,626 shares of preferred stock.

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	14
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	17
ITEM 4T.	CONTROLS AND PROCEDURES	17

PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	17
ITEM 1A.	RISK FACTORS	17
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	17
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	17
ITEM 4.	[REMOVED AND RESERVED]	17
ITEM 5.	OTHER INFORMATION	17
ITEM 6.	EXHIBITS	17

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Financial Statements

Financial Statements
Unaudited Consolidated Balance Sheets - September 30, 2011 and December 31, 2010	4
Unaudited Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2011 and 2010	5
Unaudited Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010	6
Notes to Unaudited Consolidated Financial Statements	7

DELTA SEABOARD INTERNATIONAL, INC.

Consolidated Balance Sheets

(Unaudited)


	September 30, 2011			December 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	53,286		$	24,672
Certificate of deposit		-			250,000
Trading securities		114			6,772
Accounts receivable, less allowance for doubtful accounts
of $55,087		1,822,552			1,547,434
Inventories		2,529,487			2,443,720
Prepaid expenses and other current assets		246,575			202,012
Total current assets		4,652,014			4,474,610

Property and equipment, net of accumulated depreciation		1,712,257			1,588,303
Other assets		6,500			50,025
Total assets	$	6,370,771		$	6,112,938
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	990,634		$	803,897
Bank overdrafts		32,133			-
Dividends payable		975,000			795,000
Short-term notes payable		295,890			91,183
Current installments of long-term debt		1,972,149			1,955,840
Total current liabilities		4,265,806			3,645,920

Long-term debt, less current installments		273,449			396,938
Total liabilities		4,539,255			4,042,858

Commitments and contingencies		-			-

Stockholders' equity:
Preferred stock, $0.0001 par value, authorized 5,000,000 shares;
3,769,626 shares issued and outstanding		377			377
Common stock, $0.0001 par value, authorized 195,000,000 shares;
70,892,250 and 68,342,250 shares issued and outstanding, respectively		7,089			6,834
Additional paid-in capital		4,277,438			4,150,193
Accumulated deficit		(2,453,388	)		(2,087,324	)
Total stockholders' equity		1,831,516			2,070,080
Total liabilities and stockholders' equity	$	6,370,771		$	6,112,938
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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DELTA SEABOARD INTERNATIONAL, INC.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Revenues	$	2,941,919		$	2,424,500		$	8,151,616		$	6,708,240

Costs and expenses:
Cost of sales		1,205,629			1,165,404			3,508,397			3,571,789
Selling, general and administrative		1,683,782			1,192,225			4,544,274			4,574,764
Total operating expenses		2,889,411			2,357,629			8,052,671			8,146,553

Gain on sale of equipment		37,000			-			37,000			-

Operating income (loss)		89,508			66,871			135,945			(1,438,313	)

Other income (expenses):
Interest and dividend income		-			5,000			-			5,000
Lawsuit settlement		-			-			-			700,000
Bankruptcy settlement		-			-			-			76,710
Unrealized losses on trading securities		(767	)		(1,503	)		(802	)		(7,520	)
Realized losses on trading securities		-			-			(2,247	)		-
Interest expense		(38,802	)		(31,726	)		(114,336	)		(116,991	)
Other income		14,492			5,137			66,636			32,879
Total other income (expense)		(25,077	)		(23,092	)		(50,749	)		690,078

Income (loss) before income tax		64,431			43,779			85,196			(748,235	)
Income tax expense		10,023			885			21,260			11,161
Net income (loss)	$	54,408		$	42,894		$	63,936		$	(759,396	)
Preferred dividends:
Deemed dividends		(250,000	)		-			(250,000	)		-
Regular dividends		(60,000	)		(60,000	)		(180,000	)		(180,000	)
Net loss applicable to common shareholders	$	(255,592	)	$	(17,106	)	$	(366,064	)	$	(939,396	)


Net income (loss) per common share - basic and diluted	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

Weighted average common shares - basic and diluted		70,892,250			68,342,250			70,864,228			65,207,702
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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DELTA SEABOARD INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(Unaudited)
	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	63,936		$	(759,396	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		302,829			297,325
Share-based compensation		127,500			858,750
Realized losses on trading securities		2,247			-
Unrealized losses on trading securities		802			7,520
Gain on sale of assets		(37,000	)		-
Changes in operating assets and liabilities:
Accounts receivable		(275,118	)		252,236
Inventories		(85,767	)		287,872
Prepaid expenses and other current assets		200,407			198,368
Other assets		(4,484	)		-
Accounts payable and accrued expenses		186,737			19,126
Net cash provided by operating activities		482,089			1,161,801

Cash flows from investing activities:
Proceeds from sale of trading securities		3,609			-
Purchase of trading securities		-			(975	)
Redemption of certificate of deposit		250,000			50,000
Investment in certificate of deposit		-			(500,000	)
Proceeds from the sale of property and equipment		37,000			-
Purchase of property and equipment		(302,822	)		(130,218	)
Net cash used in investing activities		(12,213	)		(581,193	)

Cash flows from financing activities:
Advances repaid to officer		-			(120,000	)
Loans to related parties		-			(75,754	)
Bank overdrafts		32,133			-
Net borrowings under lines of credit agreements and short-term notes		15,000			63,620
Payment of deemed dividends on VOMF settlement		(50,000	)		-
Principal payments on debt		(438,395	)		(398,010	)
Net cash used in financing activities		(441,262	)		(530,144	)

Net increase in cash and cash equivalents		28,614			50,464
Cash and cash equivalents at beginning of period		24,672			27,086
Cash and cash equivalents at end of period	$	53,286		$	77,550
Supplemental schedule of cash flow information:
Interest paid	$	114,336		$	116,991
Taxes paid	$	36,000		$	9,476
Non-cash investing and financing transactions:
Dividends declared and unpaid	$	180,000		$	180,000
Financing of prepaid insurance	$	244,970		$	250,753
Financing of fixed assets	$	75,952		$	-
VOMF settlement recorded as deemed dividend	$	250,000		$	-
Fixed assets placed in service reclassified from other assets	$	48,009		$	-
Issuance of common stock to convert promissory note due to American International Industries, Inc.	$	-		$	872,352
Forgiveness of accounts payable to shareholder as contribution of capital	$	-		$	42,131
Accounts payable and dividends payable assumed in reverse merger transaction	$	-		$	709,552
Short-term debt assumed in reverse merger transaction	$	-		$	802,063
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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DELTA SEABOARD INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

The accompanying unaudited interim consolidated financial statements of Delta Seaboard International, Inc. (“Delta”) 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 Delta's latest Annual Report filed with the SEC on Form 10-K for the year ended December 31, 2010. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.

Organization, Ownership and Business

Delta Seaboard International, Inc. is a 46.4% owned subsidiary of American International Industries, Inc. ("American") (OTCBB: AMIN).

On February 3, 2010, Hammonds and Delta Seaboard, a Texas corporation, completed a reverse merger. In connection with the reverse merger, Hammonds changed its name to Delta Seaboard International, Inc. Following the effective date of the Reverse Split (as defined in Note 1), Delta issued shares of common stock to the existing stockholders of Delta Seaboard as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta Seaboard, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,353 in principal and accrued interest of debt payable by Delta to American; (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., a newly appointed director of Delta as well as Delta Seaboard’s president and a director of American and Ron Burleigh, a newly-appointed director of Delta as well as Delta Seaboard’s vice president, in consideration for their 49% equity ownership of Delta Seaboard; and (iii) 9,607,843 post-Reverse Split shares in consideration for Messrs. Derrick and Burleigh extending their employment agreements for five years in addition to the balance of their current employment agreements. Stock-based compensation of $847,750 was recorded as a result of the 9,607,843 shares issued to Messrs. Derrick and Burleigh. As part of the Reverse Merger, Delta assumed $709,552 in liabilities from Hammonds, including $615,000 in preferred dividends payable in shares of Delta's common stock. Additionally, during the year ended December 31, 2010, a payable to American was forgiven and recorded as contributed capital in the amount of $42,131 for legal and audit fees incurred on behalf of Delta during the year ended December 31, 2009.

American owns 32,859,935 shares of common stock, representing 46.4% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 32,425,832 shares of common stock, representing 45.7% of Delta's total outstanding shares. All other stockholders of Delta own 5,606,483 shares of common stock, representing 7.9% of Delta's total 70,892,250 outstanding shares.

Delta Seaboard is a 100% owned subsidiary of Delta. Delta Seaboard is managed by Robert W. Derrick, Jr. and Ron Burleigh, who are Delta Seaboard's executive officers. Delta Seaboard was founded in 1958 in Houston, Texas. Delta Seaboard's well site services provide a broad range of products and services that are used by oil companies and independent oil and natural gas companies operating in South and East Texas, and the Gulf Coast market. Delta Seaboard's services include workover services, plugging and abandonment, and well completion and recompletion services.

Principles of Consolidation

The consolidated financial statements include the accounts of Delta Seaboard International, Inc. (“Delta”) and its wholly-owned subsidiary, Delta Seaboard Well Service, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to amounts in prior periods to conform with the current period presentation. All reclassifications have been applied consistently to the periods presented.

Cash and Cash-Equivalents

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

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist primarily of trade receivables, net of a valuation allowance for doubtful accounts. Delta's ability to collect outstanding receivables from our customers is critical to our operating performance and cash flows. Accounts receivable are stated at an amount management expects to collect from outstanding balances. Delta extends credit to customers and other parties in the normal course of business. Delta regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, Delta makes judgments regarding its customers' ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. When Delta determines that a customer may not be able to make required payments, Delta increases the allowance through a charge to income in the period in which that determination is made. Though Delta's bad debts have not historically been significant, we could experience increased bad debt expense should a major customer or market segment experience a financial downturn or our estimate of uncollectible accounts, which is based on our historical experience, prove to be inaccurate.

Inventories

Inventories are valued at the lower-of-cost or market on a first-in, first-out basis. Delta assesses the realizability of its inventories based upon specific usage and future utility. Delta regularly evaluates their inventory and maintain a reserve for excess or obsolete inventory. Generally, Delta records an impairment allowance for products with no movement in over twelve months that they believe to be either unsalable or salable only at a reduced selling price. Management further uses their judgment in evaluating the recoverability of all inventory based upon known and expected market conditions. A charge to income is taken when factors that would result in a need for a reduction in the valuation, such as excess or obsolete inventory, are noted.

Freight and Shipment Policy

Delta expenses all freight and shipment expenses as incurred.

Investment 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 Delta 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 shown in the caption "unrealized gains (losses) on shares available-for-sale" included in stockholders' equity. Management determines fair value of its investments based on quoted market prices at each balance sheet date.

Property 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.

Revenue Recognition

Revenue is recognized when the earning process is completed, the risks and rewards of ownership have transferred to the customer, which is generally the same day as delivery or shipment of the product, the price to the buyer is fixed or determinable, and collection is reasonably assured. Delta receives purchase orders for all of its service work and related pipe sales. All sales are recorded when the work is completed or when the pipe is sold. Taxes assessed by a governmental authority that are incurred as a result of a revenue transaction are not included in revenues. Delta has no significant sales returns or allowances.

Net Income (Loss) Per Share

The basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares outstanding during a period. Diluted net income (loss) per common share is computed by dividing the net income (loss), adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities.

For the three and nine month periods ended September 30, 2011 and 2010, preferred shares convertible into 3,769,626 common shares were excluded from the diluted earnings per share calculation for all periods because their effect would have been anti-dilutive.

Income Taxes

Delta 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.

Delta evaluates the tax benefits from uncertain positions and determines 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 September 30, 2011, Delta had not recorded any tax benefits from uncertain tax positions.

Advertising Costs

The cost of advertising is expensed as incurred.

Management's Estimates and Assumptions

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

Fair Value of Financial Instruments

Delta utilizes the 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 Delta'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.

Delta 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 Delta on its notes payable approximate market rates. The fair values of Delta's Level 1 financial assets, trading securities that primarily include shares of common stock in various companies, are based on quoted market prices of the identical underlying security. As of September 30, 2011, Delta did not have any significant Level 2 or 3 financial assets or liabilities. The following table provides fair value measurement information for Delta's trading securities:

	As of September 30, 2011
					Fair Value Measurements Using:
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Trading Securities	$	114	$	114	$	-	$	-	$	-

Subsequent Events

Delta has evaluated all subsequent events from September 30, 2011 through the issuance date of the consolidated financial statements for subsequent event disclosure consideration.

New Accounting Pronouncements

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

Note 2 - Inventories

Inventories consisted of the following:

	September 30, 2011		December 31, 2010
Finished goods	$	2,529,487	$	2,443,720
Less reserve		-		-
	$	2,529,487	$	2,443,720

Note 3 - Property and Equipment

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

	Years	September 30, 2011			December 31, 2010
Building and improvements	20	$	52,823		$	44,558
Machinery and equipment	7-15		3,678,814			3,336,247
Office equipment and furniture	7		137,696			137,696
Automobiles	5		759,131			724,013
			4,628,464			4,242,514
Less accumulated depreciation			(2,916,207	)		(2,654,211	)
Net property and equipment		$	1,712,257		$	1,588,303

During the nine months ended September 30, 2011, assets of $48,009 were placed in service and reclassified from other assets to property and equipment.

Depreciation expense for the three and nine months ended September 30, 2011 and 2010 was $98,444, $97,014, $302,829, and $297,325, respectively.

Note 4 - Short-term Notes Payable

	September 30, 2011		December 31, 2010
Insurance note payable with interest at 4.99%, principal and interest due in monthly payments of $22,796 through May 1, 2011	$	-	$	91,183
Insurance note payable with interest at 4.79%, principal and interest due in monthly payments of $22,270 through May 1, 2012		155,890		-
Note payable with interest at 0.00%, principal due in monthly payments of $20,000 through April 20, 2012 (a)		140,000
	$	295,890	$	91,183

(a) On June 29, 2011, Delta entered into an agreement, with an effective date of July 1, 2011, with Vision Opportunity Master Fund, Ltd. (“VOMF”), pursuant to which VOMF agreed to convert 3,769,626 shares of the Company’s preferred stock, constituting all of Delta’s outstanding preferred stock, into 3,769,626 shares of common stock and also agreed to waive all accrued dividends payable on the preferred stock. In consideration for the conversion, Delta agreed to pay VOMF total consideration of $250,000, $50,000 of which was paid on July 1, 2011, and the $200,000 remainder is due and payable at the rate of $20,000 per month. If Delta elects to prepay VOMF $120,000 of the balance due on or before the end of business on November 15, 2011, VOMF will consider this amount as full consideration for the payment of this note. If Delta fails to timely make the monthly payments, VOMF has the option to maintain ownership of the preferred stock, retain any and all previously paid installments, terminate the agreement, and not have waived the dividends. It is the intent of Delta to make full payment to VOMF by November 15, 2011.

Note 5 - Long-term Debt

	September 30, 2011			December 31, 2010
Note payable to a bank, which allows Delta to borrow up to $2,700,000, due in monthly payments of interest only, with interest at prime floating rate, with the principal balance due April 30, 2012, secured by assets of Delta (a)	$	1,673,527		$	1,658,527
Note payable due in monthly payments of $19,373, including interest at 6%, through March 2013, secured by assets of Delta		431,241			571,013
Note payable to a bank, due in monthly payments of $6,120, including interest at 8.25%, through August 9, 2012, secured by assets of Delta		64,464			108,442
Other secured notes with various terms, secured by assets of Delta		76,366			14,796
		2,245,598			2,352,778
Less current portion		(1,972,149	)		(1,955,840	)
	$	273,449		$	396,938

(a) During the three months ended September 30, 2011, this line of credit was renewed and the limit was increased from $2,000,000 to $2,700,000.

Principal repayment provisions of long-term debt are as follows at September 30, 2011:

2011	$	76,597
2012		1,955,411
2013		182,735
2014		18,988
2015		11,867
Total	$	2,245,598

Note 6 - Concentration of Credit Risk

Trade accounts receivable subject Delta to the potential for credit risk with customers in the retail and distribution sectors. To reduce credit risk, Delta performs ongoing evaluations of its customers' financial condition but generally does not require collateral. As of and during the nine months ended September 30, 2011, Delta had one customer that accounted for 11% of revenues, one customer that accounted for 18% of trade accounts receivable, and one customer that accounted for 12% of trade accounts receivable.

Note 7 - Income Taxes

The components of the income tax provision for the three and nine months ended September 30, 2011 and 2010 are as follows:

	Three Months ended September 30,				Nine Months ended September 30,
	2011		2010		2011		2010
Current:
Federal	$	-	$	-	$	-	$	-
State		10,023		885		21,260		11,161
Total current		10,023		885		21,260		11,161

Deferred:
Federal		-		-		-		-
State		-		-		-		-
Total deferred		-		-		-		-

Total income tax provision	$	10,023	$	885	$	21,260	$	11,161

The following table sets forth a reconciliation of the statutory federal income tax for the three and nine months ended September 30, 2011 and 2010:

	Three Months ended September 30,						Nine Months ended September 30,
	2011			2010				2011			2010
Income tax expense (benefit) computed at statutory rate	$	21,907		$	14,885		$	28,967		$	(254,400	)
Share-based compensation		-			-			43,350			291,975
Meals and entertainment		3,742			4,259			8,834			13,831
Other		-			-			-			227
Change in valuation allowance		(25,649	)		(19,144	)		(81,151	)		(51,633	)
Texas margin tax		10,023			885			21,260			11,161
	$	10,023		$	885		$	21,260		$	11,161

The tax effects of the temporary differences between financial statement income and taxable income are recognized as a deferred tax asset and liabilities. Significant components of the deferred tax asset and liability as of September 30, 2011 and December 31, 2010 are set out below:

	September 30, 2011			December 31, 2010
Deferred Tax Assets:
Net operating loss carryforward	$	377,689		$	478,916
Book depreciation in excess of tax		17,954			25,830
Other		3,065			4,832
Total deferred tax assets		398,708			509,578

Valuation allowance		(398,708	)		(509,578	)
Net deferred tax asset	$	-		$	-

Delta has loss carryforwards totaling $1,993,543 available at September 30, 2011 that may be offset against future taxable income. If not used, the carryforwards will expire as follows:

Operating Losses
Amount		Expires
$	1,110,849	2029
	882,694	2030
$	1,993,543

Note 8 - Commitments and Contingencies

Delta’s president and vice president entered into employment agreements that provide for an annual base salary of $150,000 each.

On July 23, 2008, Delta Seaboard Well Service, Inc., our wholly-owned subsidiary negotiated a settlement in the Fort Apache Energy, Inc. v. Delta Seaboard Well Service, Inc. lawsuit for $1,450,000. Delta partially recovered this loss through insurance as described below.

Delta Seaboard Well Service, Inc. v. Houstoun, Woodard, Eason, Gentle Tomforde and Anderson, Inc., D/B/A Insurance Alliance and Robert Holman (“Broker Lawsuit”). On February 19, 2010, Delta settled its claims in the Broker Lawsuit and received $700,000, which is included in other income for the nine months ended September 30, 2010.

Wintech Partners, LLC ("Wintech"), a company owned by the noncontrolling interest owners of Delta, owns 100% of Delta's Houston facilities and is responsible for the associated $1,750,000 note payable. Delta pays rent to Wintech by paying the 5.75% interest due on the note payable. Delta also has a 5,000 square foot office and warehouse facility in Louisiana which is leased from Wintech at an annual rental of $18,000.

Future minimum lease payments are as follows:

	Amount
Year December 31, 2011	$	33,300
Year December 31, 2012		77,700
Year December 31, 2013		11,100
	$	122,100

Note 9 - Equity

On January 4, 2011, Delta issued 2,550,000 restricted shares of common stock for services valued at $127,500. During the nine months ended September 30, 2011, preferred dividends of $180,000 were accrued and unpaid.

On June 29, 2011, Delta entered into an agreement, with an effective date of July 1, 2011, with Vision Opportunity Master Fund, Ltd. (“VOMF”), pursuant to which VOMF agreed to convert 3,769,626 shares of the Company’s preferred stock, constituting all of Delta’s outstanding preferred stock, into 3,769,626 shares of common stock and also agreed to waive all accrued dividends payable on the preferred stock. In consideration for the conversion, Delta agreed to pay VOMF total consideration of $250,000, $50,000 of which was paid on July 1, 2011, and the $200,000 remainder is due and payable at the rate of $20,000 per month. In September 2011, Delta and VOMF entered into an agreement wherby if Delta elects to prepay VOMF $120,000 of the balance due on or before the end of business on November 15, 2011, VOMF will consider this amount as full consideration for the payment of this note. If Delta fails to timely make the monthly payments, VOMF has the option to maintain ownership of the preferred stock, retain any and all previously paid installments, terminate the agreement, and not have waived the dividends. It is the intent of Delta to make full payment to VOMF by November 15, 2011. The consideration of $250,000 has been recorded as a deemed dividend.

Delta has 5,000,000 authorized, 3,769,626 issued and outstanding, Preferred Shares consisting of Series A and Series B convertible into one share of Delta's common stock.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this Quarterly Report, the terms "we", "us", "our" and the "Company" means Delta Seaboard International, Inc., a Texas corporation, and its subsidiary, Delta Seaboard Well Service, Inc. (collectively, "Delta"). 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

Delta, a Texas corporation, is a 46.4% owned subsidiary of American International Industries, Inc. ("American") (OTCBB: AMIN).

Results of Operations for Delta

Three and Nine Months Ended September 30, 2011 Compared to the Three and Nine Months ended September 30, 2010

During the three months ended September 30, 2011, Delta had revenues of $2,941,919, compared to $2,424,500 during the three-month period ended September 30, 2010, representing an increase of $517,419, or 21.3%. During the nine months ended September 30, 2011, Delta had revenues of $8,151,616, compared to $6,708,240 during the nine-month period ended September 30, 2010, representing an increase of $1,443,376, or 21.5%. Rig service revenues increased for the three and nine months ended September 30, 2011, compared to the same period in the prior year by $551,994 and $1,207,556, respectively. Rig service revenues have increased due to major maintenance on two rigs during 2010. These rigs are operating in 2011. Pipe sales decreased for the three months ended September 30, 2011, compared to the same period in the prior year by $34,575. Pipe sales increased for the nine months ended September 30, 2011, compared to the same period in the prior year by $235,820.

Operating expenses increased by $531,782, to $2,889,411 for the three months ended September 30, 2011, compared to operating expenses of $2,357,629 for the three months ended September 30, 2010. Operating expenses increased due to higher rig service. Operating expenses decreased by $93,882, to $8,052,671 for the nine months ended September 30, 2011, compared to operating expenses of $8,146,553 for the nine months ended September 30, 2010. Cost of sales for the nine months ended September 30, 2011 was $3,508,397, compared to $3,571,789 during the same period in the prior year, a decrease of $63,392. Margins on pipe sales were 26.9% for the nine months ended September 30, 2011, compared to 21.8% for the nine months ended September 30, 2010. The increase in margins was due to the sale of high-priced pipe from inventory during the nine months ended September 30, 2010. General and administrative expenses were $4,544,274 for the nine months ended September 30, 2011, compared to $4,574,764 for the nine-month period ended September 30, 2010, a decrease of $30,490 from the prior period. For the nine months ended September 30, 2010, general and administrative expenses include non-cash stock-based compensation of $858,790 primarily to the executive officers of Delta Seaboard in consideration for extending their employment agreements (as described in Note 1). Non-cash stock-based compensation for the nine months ended September 30, 2011 was $127,500. General and administrative expenses related to rig service revenues have increased as a result of the increase in revenues during the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010.

Delta had operating income of $89,508 during the three months ended September 30, 2011, compared to $66,871 during the three months ended September 30, 2010, an increase of $22,363 from the prior period. Delta had operating income of $135,945 during the nine months ended September 30, 2011, compared to an operating loss of $1,438,313 during the nine months ended September 30, 2010, an improvement of $1,574,258 from the prior period.

Other expenses during the three month period ended September 30, 2011 were $25,077, compared to $23,092 during the same period in the prior year, an increase of $1,985 from the prior period. Other expenses during the nine-month period ended September 30, 2011 were $50,749, compared to other income of $690,078 during the same period in the prior year, a decrease of $740,827 from the prior period. Other income for the nine months ended September 30, 2010 included the receipt of a $700,000 cash settlement for its claims in an insurance lawsuit (as described in greater detail in Note 8). Other income for the nine months ended September 30, 2010 included $76,710 for a bankruptcy settlement with one of Delta's customers.

Delta had net income of $54,408 for the three months ended September 30, 2011, compared to $42,894 for the three months ended September 30, 2010, an improvement of $11,514 from the prior period. Delta had net income of $63,936 for the nine months ended September 30, 2011, compared to a net loss of $759,396 for the nine months ended September 30, 2010, an improvement of $823,332 from the prior period.

Liquidity and Capital Resources for Delta

Liquidity is our ability to generate sufficient cash flows from operating activities 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 operations.

Capital expenditures for the nine months ended September 30, 2011 were $302,822 compared to $130,218 for the nine months ended September 30, 2010. The Company has no major capital expenditure commitments for the next 12 months.

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

As of September 30, 2011, Delta had total assets of $6,370,771, consisting primarily of $4,652,014 in current assets and $1,712,257 in property and equipment. Delta had $1,822,552 in accounts receivable and $2,529,487 in inventories as of September 30, 2011, which were included in current assets.

As of September 30, 2011, Delta had total liabilities of $4,539,255, of which $4,265,806 were current liabilities. As of September 30, 2011, Delta's current liabilities consisted of $990,634 in accounts payable, non-cash accrued stock dividends of $975,000, bank overdrafts of $32,133, $295,890 in short-term debt, and $1,972,149 in current installments of long-term debt, of which $1,673,527 is for Delta's line of credit with its bank. This line of credit has historically been renewed prior to the due date for a period of 18 to 24 months. Long-term debt, less current installments was $273,449 at September 30, 2011.

Delta had working capital of $386,208 and total stockholders’ equity of $1,831,516 as of September 30, 2011. Working capital excluding non-cash accrued stock dividends of $975,000 was $1,361,208 as of September 30, 2011.

Net cash provided by operating activities was $482,089 during the nine months ended September 30, 2011, which was derived primarily from net income of $63,936 and non-cash expenses of $430,329, including stock-based compensation of $127,500 and depreciation of $302,829. Accounts receivable increased by $275,118 and accounts payable increased by $186,737. Net cash provided by operating activities was $1,161,801 during the nine months ended September 30, 2010, which was derived from a net loss of $759,396 offset primarily by non-cash expenses of $1,156,075 including stock-based compensation of $858,750 and depreciation of $297,325. Accounts receivable decreased by $252,236, inventories decreased by $287,872, and prepaid exepnses and other current assets decreased by $198,368.

Net cash used in investing activities during the nine months ended September 30, 2011 was $12,213, compared to $581,193 during the nine months ended September 30, 2010. Net cash used in investing activities during the nine months ended September 30, 2011 was primarily for the purchase of property and equipment for $302,822, offset by the redemption of a certificate of deposit of $250,000. Net cash used by investing activities during the nine months ended September 30, 2010 was primarily for the purchase of property and equipment for $130,218 and the investment in a certificate of deposit of $500,000, offset by the redemption of a certificate of deposit of $50,000.

Net cash used in financing activities during the nine months ended September 30, 2011 was $441,262 due to principal payments on debt of $438,395 and $50,000 for the payment of the deemed dividends on the VOMF settlement, offset by net borrowings under lines of credit of $15,000 and bank overdrafts of $32,133. Net cash used in financing activities during the nine months ended September 30, 2010 was $530,144, due to principal payments on debt of $398,010, repayment of loans from related parties of $120,000, loans to related parties of $75,754, offset by net borrowings under lines of credit of $63,620.

Off-Balance Sheet Arrangements

As of September 30, 2011 and December 31, 2010, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of 1934.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. As of September 30, 2011, the Company's chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in internal controls. During the quarterly period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no updates to any legal proceedings previously disclosed.

ITEM 1A. RISK FACTORS

For the nine months ended September 30, 2011 there were no material changes from risk factors as disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. [REMOVED AND RESERVED]

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
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

By /s/ Daniel Dror

Daniel Dror

Chief Executive Officer, President, and Chairman

November 14, 2011

By /s/ Sherry L. McKinzey

Sherry L. McKinzey

Director, Chief Financial Officer, and Vice-President

November 14, 2011