10-Q 1 delta_financials.htm 2ND QUARTER 2010 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
ý                                             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
 
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 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 ¨ 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 August 16, 2010 is 68,342,250 shares of common stock and 3,769,626 shares of preferred stock.
 
 
Item
  
Description
  
Page
PART I - FINANCIAL INFORMATION
         
ITEM 1.
    
3
ITEM 2.
    
13
ITEM 3.
    
15
ITEM 4T.
    
15
         
PART II - OTHER INFORMATION
         
ITEM 1.
    
15
ITEM 1A.
    
15
ITEM 2.
    
15
ITEM 3.
    
15
ITEM 4.
    
15
ITEM 5.
    
15
ITEM 6.
    
15
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Financial Statements
 
 
 
DELTA SEABOARD INTERNATIONAL, INC.
(Formerly HAMMONDS INDUSTRIES, INC.)
Consolidated Balance Sheets
(Unaudited)
   
   
June 30, 2010
    
December 31, 2009
  
Assets
            
Current assets:
            
   Cash and cash equivalents
  
$
54,149
    
$
27,086
  
   Certificate of deposit     500,000        -  
   Trading securities
    
4,452
      
10,080
  
   Accounts receivable, less allowance for doubtful accounts
                
     of $208,130
    
1,342,175
      
1,280,537
  
   Inventories
    
2,187,511
      
1,445,102
  
   Deposits for pipe inventory purchases
    
-
      
1,336,244
  
   Prepaid expenses and other current assets
    
277,275
      
160,201
  
     Total current assets
    
4,365,562
      
4,259,250
  
  
                
Property and equipment, net of accumulated depreciation and amortization
    
1,706,897
      
1,814,026
  
Other assets
    
50,025
      
50,025
  
       Total assets
  
$
6,122,484
    
$
6,123,301
  
Liabilities and Stockholders' Equity
                
Current liabilities:
                
   Accounts payable and accrued expenses
  
$
605,052
    
$
606,694
  
   Dividends payable     675,000       -  
   Short-term notes payable
    
227,958
      
103,219
  
   Notes payable - related parties
    
-
      
 120,000
  
   Current installments of long-term debt
    
1,778,166
      
1,639,807
  
     Total current liabilities
    
3,286,176
      
2,469,720
  
                 
Long-term debt, less current installments
    
544,479
      
701,081
  
     Total liabilities
    
3,830,655
      
3,170,801
  
                 
Commitments and contingencies 
    
-
      
 -
  
                 
Stockholders' equity:
                
   Preferred stock, $0.0001 par value, authorized 5,000,000 shares;
                
     3,769,626 and 0 shares issued and outstanding
  
 
377
    
 
- 
  
   Common stock, $0.0001 par value, authorized 195,000,000 shares;
                
     68,342,250 and 43,503,082 shares issued and outstanding, respectively
    
6,834
      
4,350
  
   Additional paid-in capital
    
4,150,193
 
    
3,891,435
  
   Accumulated deficit
    
(1,865,575
) 
    
 (943,285
) 
     Total stockholders' equity
    
2,291,829
      
2,952,500
  
     Total liabilities and stockholders' equity
  
$
6,122,484
    
 $
6,123,301
  
 
The accompanying notes are an integral part of these unaudited financial statements. 
 
 
4
 
DELTA SEABOARD INTERNATIONAL, INC.
(Formerly HAMMONDS INDUSTRIES, INC.)
Consolidated Statements of Operations
(Unaudited)


   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
  
  
2010
    
2009
    
2010
    
2009
  
                         
Revenues
  
$
2,045,082
    
$
2,331,214
    
$
4,283,740
    
$
4,795,125
  
Costs and expenses:
                                
   Cost of sales
      1,038,808        943,305        2,406,385         2,008,983  
   Selling, general and administrative
      1,166,827        1,614,960         3,382,539        3,280,436  
     Total operating expenses
      2,205,635        2,558,265        5,788,924         5,289,419  
                                 
Operating loss
     (160,553 )       (227,051 )        (1,505,184 )        (494,294 ) 
  
                                
Other income (expenses):
                                
   Interest and dividend income
      -        1,073        -         2,495  
   Lawsuit settlement
      -        -         700,000         -  
   Bankruptcy settlement      76,710        -       76,710        -  
   Unrealized losses on trading securities
      (5,398 )       (3,616 )        (6,017 )        (1,004 ) 
   Interest expense
      (44,899 )       (61,572 )       (85,265 )      (114,603 ) 
   Other income
      4,450        5,204       27,742         21,830  
     Total other income (expense)
     30,863        (58,911 )       713,170         (91,282 ) 
  
                                
     Loss before income tax
      (129,690 )       (285,962 )      (792,014 )        (585,576 ) 
     Income tax expense
     4,878        5,639       10,276         11,676  
     Net loss
   $  (134,568 )    $   (291,601 )    $  (802,290 )    $   (597,252 ) 
Preferred dividends: 
                                
     Regular dividends
      (60,000 )       -        (120,000 )        -  
     Net loss applicable to common shareholders
   $  (194,568 )    $  (291,601 )    $  (922,290 )    $    (597,252 ) 
                                 
Net loss per common share - basic and diluted
   $   -     $  (0.01 )    $  (0.01 )    $    (0.01 ) 
Weighted average common shares - basic and diluted
      68,342,250        43,503,082        63,614,450         43,503,082  
 
The accompanying notes are an integral part of these unaudited financial statements.
  
Back to Table of Contents
5
DELTA SEABOARD INTERNATIONAL, INC.
(Formerly HAMMONDS INDUSTRIES, INC.)
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended June 30,
   
2010
  
2009
  
Cash flows from operating activities:
              
   Net loss
  
$
(802,290
 ) 
$
(597,252
)
   Adjustments to reconcile net loss to net cash provided by operating activities:
              
       Depreciation
    
200,311
    
229,205
  
       Share-based compensation     858,750     -  
       Unrealized losses on trading securities
    
6,017
    
1,004
  
       Change in operating assets and liabilities:
              
          Accounts receivable
    
(61,638
)
  
645,943
  
          Trading securities
    
(389
)
  
(1,155
)
          Inventories and deposits for pipe inventory purchases
    
593,835
    
(54,075
 ) 
          Prepaid expenses and other current assets
    
(117,074
)
  
(138,627
)
          Accounts payable and accrued expenses
    
(43,774
 )   
41,469
 
             Net cash provided by operating activities
    
633,748
    
126,512
 
               
Cash flows from investing activities:
              
   Purchase of property and equipment
    
(93,182
)
  
(93,441
)
   Investment in certificate of deposit      (500,000 )     -  
   Proceeds from notes receivable
    
-
    
55,948
  
            Net cash used in investing activities
    
(593,182
 )  
(37,493
)
  
              
Cash flows from financing activities:
              
   Repayment of loans from related parties
    
(120,000
 )  
-
  
   Net borrowings (repayments) under lines of credit agreements and short-term notes
    
119,199
 
  
5,960
  
   Proceeds from issuance of debt      250,753      283,851  
   Principal payments on debt
    
(263,455
)
  
(414,312
)
            Net cash used in financing activities
    
(13,503
)
  
(124,501
 )
               
Net increase (decrease) in cash and cash equivalents
  
 $
27,063
  
 $
(35,482
)
Cash and cash equivalents at beginning of period
    
27,086
 
  
24,285
  
Cash and cash equivalents at end of period
  
 $
54,149
  
 $
(11,197
)
Supplemental schedule of cash flow information:
              
   Interest paid    $ 85,265    $ 114,603  
   Taxes paid    $  -    $  -  
Non-cash investing and financing transactions:               
   Issuance of common stock to convert promissory note due to American International Industries, Inc.
    $   872,353    $   -  
   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    $  -  
   Dividends declared and unpaid
  
 $
 120,000
 
$
-
  
 
The accompanying notes are an integral part of these unaudited financial statements.

6
  DELTA SEABOARD INTERNATIONAL, INC.
(Formerly HAMMONDS INDUSTRIES, 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 financial statements and notes thereto for the year ended December 31, 2009 contained in Delta's Form 8-K filed with the SEC on March 4, 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 8-K have been omitted.
 
Organization, Ownership and Business
 
Delta Seaboard International, Inc., formerly Hammonds Industries, Inc., a Texas corporation, is a 48.1% owned subsidiary of American International Industries, Inc. ("American") (OTCBB: AMIN).
 
On February 3, 2010, Hammonds and Delta Seaboard Well Service, Inc. ("Delta Seaboard"), a Texas corporation, completed a reverse merger ("Reverse Merger").  In connection with the reverse merger, Hammonds changed its name to Delta Seaboard International, Inc. and authorized a reverse stock split ("Reverse Split") applying a ratio of one for ten (1:10) to all shareholders of common stock on record on December 31, 2009.  Following the effective date of the Reverse Split, Delta issued shares of common stock to the existing stockholders of Delta Seaboard as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta Seaboard, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,353 in principal and accrued interest of debt payable by Delta to American; (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., a newly appointed director of Delta as well as Delta Seaboard’s president and a director of American and Ron Burleigh, a newly-appointed director of Delta as well as Delta Seaboard’s vice president, in consideration for their 49% equity ownership of Delta Seaboard; and (iii) 9,607,843 post-Reverse Split shares in consideration for Messrs. Derrick and Burleigh extending their employment agreements for five years in addition to the balance of their current employment agreements. Following the Reverse Split and Reverse Merger, American owns 32,859,935 shares of common stock, representing 48.1% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 30,924,353 shares of common stock, representing 45.2% of Delta's total outstanding shares. All other stockholders of Delta own 4,557,962 shares of common stock, representing 6.7% of Delta's total 68,342,250 outstanding shares. All common share amounts have been retroactively adjusted to reflect the Reverse Split.  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.
 
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.
 
Principals 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.
 
Certain reclassifications have also 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.
 
 
7
Accounts Receivable
 
Accounts receivable consist primarily of trade receivables, net of a valuation allowance for doubtful accounts.
 
Allowance for Doubtful Accounts
 
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.
 
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. 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's policy is to expense 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, 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.
 
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.
 
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.
 
 
8
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 June 30, 2010, 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 June 30, 2010, 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 June 30, 2010
  
               
 Fair Value Measurements Using:
  
   
Carrying
Amount
    
Total
Fair Value
    
Quoted Prices
in Active Markets
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable Inputs
(Level 3)
  
Financial Assets:
                              
  Trading Securities
  
$
4,452
    
$
4,452
   
$
4,452
   
$
-
    
$
-
  
 
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.
 
9
Note 2 - Inventory and Deposits for Pipe Inventory Purchases
 
Inventories consisted of the following:
   
June 30, 2010
    
December 31, 2009
  
Finished goods
  
$
2,187,511
    
$
1,445,102
  
Less reserve
    
-
      
-
  
   
$
2,187,511
    
$
1,445,102
  
 
At December 31, 2009, Delta had cash deposits of $1,336,244 for inventory purchases under these agreements that had not been received. At June 30, 2010, these pipe purchases are included in inventory.
 
Note 3 - Property and Equipment
 
Major classes of property and equipment together with their estimated useful lives, consisted of the following:
 
 
Years
  
June 30, 2010
   
December 31, 2009
 
Building and improvements
20
  
$
44,558
    
$
44,558
  
Machinery and equipment
7-15
    
3,265,083
      
3,171,901
  
Office equipment and furniture
7
    
135,160
      
135,160
 
Automobiles
5
    
745,712
      
745,712
 
       
4,190,513
      
4,097,331
  
Less accumulated depreciation
      
(2,483,616
) 
    
(2,283,305
) 
Net property and equipment
    
$
1,706,897
    
$
1,814,026
  
 
Depreciation expense for the three and six months ended June 30, 2010 and 2009 was $97,009, $116,840, $200,311 and $229,205, respectively.
 
Note 4 - Short-term Notes Payable
   
June 30, 2010
   
December 31, 2009
 
Insurance note payable with interest at 4.99%, principal and interest due in monthly payments of $22,796 through May 1, 2011
  
$ 
227,958
    
$
103,219
  
   
$
227,958
    
$
103,219
  
 
Note 5 - Long-term Debt
 
Long-term debt consisted of the following:
   
June 30, 2010
   
December 31, 2009
 
Note payable to a bank, which allows Delta to borrow up to $2,000,000, due in monthly payments of interest only, with interest at prime floating rate, with the principal balance due in April 2011, secured by assets of Delta
  
$
1,489,106
    
$
1,369,907
  
Note payable due in monthly payments of $19,373, including interest at 6%, through March 2013, secured by assets of Delta     668,037       761,982  
Note payable to a bank, due in monthly payments of $6,120, including interest at 8.25%, through August 9, 2012, secured by assets of Delta
    
139,873
      
174,990
  
Other secured notes with various terms
    
25,629
      
 34,009
  
     
2,322,645
      
2,340,888
  
Less current portion
    
(289,060
) 
    
(1,639,807
) 
   
$
2,033,585
    
$
701,081
  

 
10
Principal repayment provisions of long-term debt are as follows at June 30, 2010:
 
2010
$
147,707
  
2011
  
1,776,458
  
2012
  
266,611
  
2013
  
131,869
  
Total
$
2,322,645
  
 
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 three months ended June 30, 2010, Delta had one customer that accounted for 35% of revenues, one customer that accounted for 17% of trade accounts receivable, one customer that accounted for 12% of trade accounts receivable, and one customer that accounted for 11% of trade accounts receivable.
 
Note 7 - Income Taxes
 
Delta has loss carryforwards totaling $1,708,413 available at December 31, 2009 that may be offset against future taxable income.  If not used, the carryforwards will expire as follows:
Operating Losses
Amount
  
Expires
$
208,763
  
2027
$  213,174   2028
$  1,286,476   2029
 
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 three months ended June 30, 2010.
 
Delta is a co-defendant in a personal injury lawsuit, Karen Duke and as next friend of her minor son, George Duke v. Delta Seaboard Well Service, Inc. and Jimmy Newcomb. This lawsuit arises out of a motor vehicle accident that occurred on July 31, 2006. The plaintiffs are claiming an unspecified amount of claimed actual and consequential economic damages (for medical expenses and lost wages / diminished earnings capacity), plus an unspecified amount of claimed damages for their alleged “pain & suffering.” This case went to trial and the jury rendered a verdict on September 17, 2009, awarding the plaintiff $263,410 plus court costs in damages. On February 22, 2010, the trial judge entered a $269,138 judgment in favor of the plaintiffs. The attorneys plan a motion for a new trial. Delta has liability insurance policy with applicable policy limits of $1,000,000. Management believes that Delta has a more than adequate amount of available liability insurance coverage to fund any judgment that might be entered. Delta intends to vigorously defend this case. An evaluation of the outcome of this case cannot be made at this time. Delta expects to prevail in these matters and has not recorded any liabilities in connection with this lawsuit.
 
Delta is the recipient of a Texas Emissions Reduction Plan ("TERP") grant from the Texas Commission on Environmental Quality in the amount of $1,157,273, of which $781,728 has been recognized through December 31, 2008.  For the six months ended June 30, 2010, no TERP grant revenue has been recognized.  TERP is a comprehensive set of incentive programs aimed at improving air quality in Texas. Through this grant, Delta’s rig engines are being replaced with engines certified to emit 25% less nitrogen oxide (“NOx”) than required under the current federal standard for the horsepower of the engines. The old engines must be destroyed or rendered permanently inoperable.
 
TERP grant recipients are required to monitor and track the total NOx emission reductions and cost-effectiveness. The grant contract includes provisions for the return of a prorated share of the grant if the NOx emission reductions originally projected are not achieved. Delta has not recorded any liabilities in connection with this matter because management has determined that return of any grant receipts is not likely.  Based on the advice of the State of Texas authorities who administer the grant, the taxability of this grant has not been determined and the advice of the Internal Revenue Service has been inconsistent.  Delta is still determining the effect this will have, but believes it will not materially affect Delta because of the tax loss carryforwards explained in Note 7.
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Note 9 - Equity
 
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. Following the Reverse Split and Reverse Merger, American owns 32,859,935 shares of Common Stock, representing 48.1% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 30,924,353 shares of common stock, representing 45.2% of Delta's total outstanding shares. All other stockholders of Delta own 4,557,962 shares of common stock, representing 6.7% of Delta's total 68,342,250 outstanding shares. As part of the Reverse Merger, Delta assumed $709,552 in liabilities from Hammonds, including $615,000 in preferred dividends payable in shares of Delta's common stock.
 
Additionally, during the three months ended June 30, 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.
 
During the three months ended June 30, 2010, Delta issued 200,000 restricted shares of common stock as stock-based compensation at a cost of $11,000.  John W. Stump III and Richard C. Richardson, two former officers of Hammonds, each received 100,000 restricted shares of common stock in connection with a settlement and release agreement.
 
 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION

As used in this Quarterly Report, the terms "we", "us", "our" and the "Company" means Delta Seaboard International, Inc., formerly Hammonds Industries, 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 48.1% owned subsidiary of American International Industries, Inc. ("American") (OTCBB: AMIN).  
 
On February 3, 2010, Hammonds and Delta Seaboard Well Service, Inc. ("Delta Seaboard"), a Texas corporation, completed a reverse merger ("Reverse Merger").  In connection with the reverse merger, Hammonds changed its name to Delta Seaboard International, Inc. and authorized a reverse stock split ("Reverse Split") applying a ratio of one for ten (1:10) to all shareholders of common stock on record on December 31, 2009.  Following the effective date of the Reverse Split, Delta issued shares of common stock to the existing stockholders of Delta Seaboard as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta Seaboard, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,353 in principal and accrued interest of debt payable by Delta to American; (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., a newly appointed director of Delta as well as Delta Seaboard’s president and a director of American and Ron Burleigh, a newly-appointed director of Delta as well as Delta Seaboard’s vice president, in consideration for their 49% equity ownership of Delta Seaboard; and (iii) 9,607,843 post-Reverse Split shares in consideration for Messrs. Derrick and Burleigh extending their employment agreements for five years in addition to the balance of their current employment agreements. Following the Reverse Split and Reverse Merger, American owns 32,859,935 shares of common stock, representing 48.1% of Delta's total outstanding shares and Messrs. Derrick and Burleigh, the owners of the noncontrolling interest in Delta Seaboard, own 30,924,353 shares of common stock, representing 45.2% of Delta's total outstanding shares. All other stockholders of Delta own 4,557,962 shares of common stock, representing 6.7% of Delta's total 68,342,250 outstanding shares. All common share amounts have been retroactively adjusted to reflect the Reverse Split. 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.
 
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.
 
Results of Operations for Delta
 
Three and Six Months Ended June 30, 2010 Compared to the Three and Six Months ended June 30, 2009
 
During the three months ended June 30, 2010, Delta had revenues of $2,045,082, compared to $2,331,214 during the three-month period ended June 30, 2009, representing a decrease of $286,132, or 12%. During the six months ended June 30, 2010, Delta had revenues of $4,283,740, compared to $4,795,125 during the six-month period ended June 30, 2009, representing a decrease of $511,385, or 11%.  The decrease in revenues is due to a decrease in rig service revenues for the three and six months ended June 30, 2010, compared to the same period in the prior year, of $815,544 and $1,016,049, respectively.  Rig service revenues have decreased due to major maintenance on two rigs during 2010.  This was partially offset by an increase in pipe sales for the three and six months ended June 30, 2010, compared to the same period in the prior year, of $529,412 and $504,664, respectively.
 
 
 
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Operating expenses decreased by $352,630, to $2,205,635 for the three months ended June 30, 2010, compared to operating expenses of $2,558,265 for the three months ended June 30, 2009. Operating expenses declined due to decreased expenses associated with rig service revenues.  Operating expenses increased by $499,505, to $5,788,924 for the six months ended June 30, 2010, compared to operating expenses of $5,289,419 for the six months ended June 30, 2009.  Cost of sales for the six months ended June 30, 2010 was $2,406,385, compared to $2,008,983 during the same period in the prior year, an increase of $397,402. The increase in cost of sales was due to the increase in pipe sales during the six months ended June 30, 2010.  General and administrative expenses were $3,382,539 for the six months ended June 30, 2010, compared to $3,280,436 for the six-month period ended June 30, 2009, an increase of $102,103 from the prior period.  The increase in general and administrative expenses is due primarily to 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).  This increase was offset significantly by lower operating expenses associated with the decline in rig service revenues.
 
Delta had an operating loss of $160,553 during the three months ended June 30, 2010, compared to $227,051 during the three months ended June 30, 2009, a decrease of $66,498 from the prior period. Delta had an operating loss of $1,505,184 during the six months ended June 30, 2010, compared to $494,294 during the six months ended June 30, 2009, an increase of $1,010,890 from the prior period.
 
Other income during the three-month period ended June 30, 2010 was $30,863, compared to other expenses of $58,911 during the same period in the prior year, an increase in other income of $89,774 from the prior period. Other income during the three-month period ended June 30, 2010 included $76,710 for a bankruptcy settlement with one of Delta's customers. Other income during the six-month period ended June 30, 2010 was $713,170, compared to other expenses of $91,282 during the same period in the prior year, and increase in other income of $804,452 from the prior period. Other income increased for the six months ended June 30, 2010 compared to the prior period, mainly due to the receipt of a $700,000 cash settlement for its claims in an insurance lawsuit (as described in greater detail in Note 8).
 
Delta had a net loss of $134,568 for the three months ended June 30, 2010, compared to $291,601 for the three months ended June 30, 2009, a decrease in net loss of $157,033 from the prior period.  Delta had a net loss of $802,290 for the six months ended June 30, 2010, compared to $597,252 for the six months ended June 30, 2009, an increase in net loss of $205,038 from the prior period.
 
Liquidity and Capital Resources for Delta
 
As of June 30, 2010, Delta had total assets of $6,122,484, consisting primarily of $4,365,562 in current assets and $1,706,897 in property and equipment. Delta had $1,342,175 in accounts receivable and $2,187,511 in inventories as of June 30, 2010, which were included in current assets.
 
As of June 30, 2010, Delta had total liabilities of $3,830,655, of which $3,286,176 were current liabilities. As of June 30, 2010, Delta's current liabilities consisted of $1,280,052 in accounts payable and accrued dividends, $227,958 in short-term debt, and $1,778,166 in current installments of long-term debt.
 
Delta had working capital of $1,079,386 and total stockholders’ equity of $2,291,829 as of June 30, 2010.
 
Net cash provided by operating activities was $633,748 for the six months end June 30, 2010, which was derived from a net loss of $802,290, and offset primarily by stock-based compensation of $858,750, depreciation of $200,311, and a decrease in inventories and deposits for pipe inventory purchases of $593,835. Net cash provided by operating activities for the six months ended June 30, 2009 was $126,512, which was derived from a net loss of $597,252 and offset primarily by depreciation of $229,205 and a decrease in accounts receivable of $645,943.
 
Net cash used in investing activities for the six-month period ended June 30, 2010 was $593,182, compared to $37,493 for the six-month period ended June 30, 2009.  Net cash used in investing activities for the six months ended June 30, 2010 was for the purchase of property and equipment for $93,182 and an investment in a certificate of deposit of $500,000.  Net cash provided by investing activities for the six months ended June 30, 2009 included proceeds from notes receivable of $55,948 offset by the purchase of property and equipment for $93,441.
 
Net cash used in financing activities during the six months ended June 30, 2010 was $13,503, primarily due to principal payments on debt of $263,455 and repayment of loans from related parties of $120,000, offset by borrowings under lines of credit of $119,199 and the issuance of short-term debt of $250,753.  Net cash used in financing activities during the six months ended June 30, 2009 was $124,501, due to principal payments on debt of $414,312, offset by the issuance of short-term debt of $283,851.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2009 and June 30, 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable
 
ITEM 4T. CONTROLS AND PROCEDURES
 
Evaluation of disclosure controls and procedures. As of June 30, 2010, the Company's chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 
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 six months ended June 30, 2010 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, 2009.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three months ended June 30, 2010, Delta issued 200,000 restricted shares of common stock as stock-based compensation at a cost of $11,000.  John W. Stump III and Richard C. Richardson, two former officers of Hammonds, each received 100,000 restricted shares of common stock in connection with a settlement and release agreement.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
 
ITEM 5. OTHER INFORMATION
None.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
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
 
 
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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
August 16, 2010
 
 
By /s/ Sherry L. Couturier
Sherry L. Couturier
Director, Chief Financial Officer, and Vice-President
August 16, 2010