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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

o 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 000-52506

ESP RESOURCES, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
98-0440762
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

9595 Six Pines Drive Suite 6305 The Woodlands, Texas 77380
(Address of principal executive offices) (Zip Code)

(337) 706-7056
(Issuer’s telephone number)
______________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 þ No o

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

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
(Do not check if a smaller reporting company.)
     

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 137,580,249 common shares issued and outstanding as of November 12, 2012.
 


 
 

 
 
PART I - FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

It is the opinion of management that the interim financial statements for the quarter and nine months ended September 30, 2012 included all adjustments necessary in order to ensure that the interim financial statements are not misleading.

ESP Resources, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
   
September 30,
2012
   
December 31,
2011
 
   
(Unaudited)
       
ASSETS
CURRENT ASSETS
           
Cash and cash equivalents
  $ 345,775     $ 126,456  
Restricted cash
    197,306       192,198  
Accounts receivable, net
    2,585,875       1,920,933  
Inventories, net
    1,954,446       1,571,889  
Prepaid expenses and other current assets
    72,280       360,525  
                 
Total current assets
    5,155,682       4,172,001  
                 
Property and equipment, net of accumulated depreciation of $1,135,986 and $750,519, respectively
    3,457,644       2,690,122  
Other assets
    102,337       50,262  
                 
Total assets
  $ 8,715,663     $ 6,912,385  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
CURRENT LIABILITIES
               
Accounts payable
  $ 2,537,814     $ 1,574,521  
Factoring payable
    1,846,390       1,642,285  
Accrued expenses
    367,369       387,465  
Due to related parties
    55,542       76,286  
Guarantee liability
    120,000       120,000  
Due to Turf shareholders for acquisition
    7,379       -  
Short-term debt
    51,016       270,528  
Current maturities of long-term debt
    802,431       701,016  
Current portion of capital lease obligation
    237,880       113,401  
                 
Total current liabilities
    6,025,821       4,885,502  
                 
Long-term debt (less current maturities)
    1,244,901       1,032,135  
Capital lease obligations (less current maturities)
    337,036       191,319  
Contingent consideration payable for acquisition of Turf
    31,437       31,437  
Deferred lease cost
    23,000       25,000  
                 
Total liabilities
    7,662,195       6,165,393  
                 
STOCKHOLDERS' EQUITY
               
Common stock - $0.001 par value, 350,000,000 shares authorized, 137,580,249 and 110,000,008 shares issued and outstanding, respectively
    137,580       110,000  
Preferred stock - $0.001 par value, 10,000,000 shares authorized in 2011, zero outstanding
               
Additional paid-in capital
    17,523,744       15,115,452  
Subscription receivable
    (1,000 )     (1,000 )
Accumulated deficit
    (16,606,856 )     (14,477,460 )
                 
Total stockholders' equity
    1,053,468       746,992  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 8,715,663     $ 6,912,385  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
2

 

ESP Resources, Inc.
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2012 and 2011
(Unaudited)
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
SALES, NET
  $ 4,461,459     $ 3,425,518     $ 14,352,271     $ 7,535,739  
COST OF GOODS SOLD
    2,248,453       1,626,194       7,854,109       3,589,977  
                                 
GROSS PROFIT
    2,213,006       1,799,324       6,498,162       3,945,762  
                                 
General and administrative
    2,893,103       2,219,746       7,552,284       5,951,297  
Depreciation and amortization
    194,134       182,030       515,686       472,659  
Gain on disposal of assets
    (10,000 )     -       (18,415 )     -  
                                 
LOSS FROM OPERATIONS
    (864,231 )     (602,452 )     (1,551,393 )     (2,478,194 )
                                 
OTHER INCOME (EXPENSE)
                               
Interest expense
    (51,725 )     (25,004 )     (143,783 )     (103,295 )
Factoring fees
    (162,680 )     (70,268 )     (377,032 )     (159,760 )
Amortization of debt discount
    (11,128 )     (5,224 )     (65,058 )     (5,224 )
Other income, net
    1,648       (3,161 )     4,611       (3,884 )
Interest income
    3,224       -       3,259       57  
                                 
Total other expense
    (220,661 )     (103,657 )     (578,003 )     (272,106 )
                                 
NET LOSS
  $ (1,084,892 )   $ (706,109 )   $ (2,129,396 )   $ (2,750,300 )
                                 
NET LOSS PER SHARE (basic and diluted)
  $ (0.01 )   $ (0.01 )   $ (0.02 )   $ (0.03 )
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
    125,118,317       103,791,810       119,151,656       99,972,348  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
3

 
 
ESP Resources, Inc.
Condensed Statement of Stockholders’ Equity
For the nine months ended September 30, 2012
(Unaudited)

   
Common stock
         
Subscription
   
Accumulated
       
   
Number
   
Par Value
   
APIC
   
Receivable
   
Deficit
   
Total
 
Balance, December 31, 2011
    110,000,008       110,000       15,115,452       (1,000 )     -14,477,460       746,992  
                                                 
Stock based compensation
    12,868,182       12,868       1,137,057       -       -       1,149,925  
                                                 
Shares issued in connection with accounts payable conversion
    166,434       167       26,129       -       -       26,296  
                                                 
Shares issued for cash
    1,195,625       1,195       123,805       -       -       125,000  
                                                 
Shares issued with private placement
    13,350,000       13,350       1,050,010       -       -       1,063,360  
                                                 
Discount on debt from warrants and beneficial conversion feature
    -       -       71,291       -       -       71,291  
                                                 
Net loss
    -       -       -       -       (2,129,396 )     (2,129,396 )
                                                 
Balance September 30, 2012
    137,580,249       137,580       17,523,744       (1,000 )     (16,606,856 )     1,053,468  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4

 
 
ESP Resources, Inc.
Condensed Consolidated Statements of Cash Flow
For the nine months ended September 30, 2012 and 2011
(Unaudited)
 
    September 30,  
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (2,129,396 )   $ (2,750,300 )
Adjustments to reconcile net loss to net cash
               
used for operating activities:
               
Amortization of debt discount
    65,058       5,224  
Gain on disposal of assets
    (18,415 )     -  
Depreciation and amortization, net disposals
    515,686       531,274  
Bad debt expense
    43,112       -  
Stock based compensation
    1,149,925       1,726,334  
Changes in operating assets and liabilities:
               
Accounts receivable
    (708,054 )     (251,485 )
Inventory
    (382,557 )     (932,924 )
Prepaid expenses and other current assets
    288,245       65,623  
Other assets
    (52,075 )     9,848  
Accounts payable
    1,339,589       639,172  
Accrued expenses
    (14,715 )     126,271  
Accrued expense to related parties
    (20,744 )     (25 )
                 
CASH USED IN OPERATING ACTIVITIES
    75659       (830,988 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Restricted cash
    (5,108 )     (66,294 )
Proceeds from the sale of vehicle
    12,500       -  
Purchase of fixed assets
    (770,689 )     (769,983 )
                 
CASH USED IN INVESTING ACTIVITIES
    (763,297 )     (836,277 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Borrowing on convertible debt
    130,000       233,799  
Repayment of long term debt
    (291,950 )     (261,282 )
Repayment of capital leases
    (104,045 )     (54,934 )
Net factoring advances
    204,105       667,264  
Proceeds from sales of units in private placement, net
    1,063,360       765,440  
Proceeds from sale of stock
    125,000       25,000  
Collecton on subscription receivable
    -       25,000  
REPAYMENT OF SHORT TERM DEBT     (219,513 )        
                 
CASH PROVIDED BY FINANCING ACTIVITIES
    906,957       1,400,287  
                 
NET INCREASE IN CASH
    219,319       (266,978 )
CASH AT BEGINNING OF PERIOD
    126,456       531,290  
                 
CASH AT END OF PERIOD
  $ 345,775     $ 264,312  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash paid for interest and factoring cost
  $ 502,058     $ 238,055  
Non-cash investing and financing transactions:
               
Notes issued for purchase of property and equipment
  $ 455,628     $ 864,248  
Assets returned and release of notes payable
    -       59,463  
Notes issued for settlement of accounts payable
    350,000       -  
Debt discount on shares issued with convertible debt
    71,291       44,250  
Stock issued for accounts payable conversion
    26,296       148,411  
Purchase capital lease
    -       205,236  
Trade-in of equipment
    -       44,676  
Sale-Lease Back of Equipment     304,879        
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
5

 
 
ESP Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2012

Note 1 – Basis of Presentation, Nature of Operations and Significant Accounting Policies

Basis of Presentation

ESP Resources, Inc. (“ESP Resources”, and collectively with its subsidiaries, “we, “our” or the “Company”) was incorporated in the State of Nevada on October 27, 2004. The accompanying unaudited condensed consolidated financial statements include the accounts of ESP Resources, Inc. and its wholly owned subsidiaries, ESP Petrochemicals, Inc. of Louisiana (“ESP Petrochemicals”), ESP Ventures, Inc. of Delaware (“ESP Ventures”), ESP Corporation, S.A., a Panamanian corporation (“ESP Corporation”) and ESP Payroll Services, Inc. of Nevada (“ESP Payroll”).  On July 11, 2012 the Company formed two partially owned subsidiaries in Delaware, ESP Advanced Technologies, Inc., and ESP Facility & Pipeline Services, Inc.

The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America. Any reference herein to “ESP Resources”, the “Company”, “we”, “our” or “us” is intended to mean ESP Resources, Inc. including the wholly-owned subsidiaries indicated above, unless otherwise indicated.

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Interim Financial Statements

The condensed unaudited consolidated financial statements presented herein have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) and the accounting policies set forth in our audited consolidated financial statements for the period ended December 31, 2011 as filed with the Securities and Exchange Commission (the “SEC”) in the Company’s Annual Report on Form 10-K and should be read in conjunction with the notes thereto. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations presented for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year. These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Concentrations

The Company has three major customers that together account for 63.6% of accounts receivable as of September 30, 2012 and 77.0% of the total revenues earned for the nine months ended September 30, 2012 as follows:

   
Accounts
Receivable
   
Revenue
 
Customer A
   
36.5
%
   
37.5
%
Customer B
   
17.3
%
   
21.8
%
Customer C
   
9.9
%
   
17.7
%
Totals:
   
63.6
%
   
77.0
%

 
6

 
 
The Company has two vendors that accounted for 81.2% of chemical purchases during the nine months ended September 30, 2012 and 59.7% of the ending accounts payable at September 30, 2012 as follows:

   
Accounts
Payable
   
Purchases
 
Vendor A
   
51.6
%
   
68.0
%
Vendor B
   
8.2
%
   
13.2
%
Totals:
   
59.7
%
   
81.2
%

Revenue and Cost Recognition

The Company operates in the oil and gas services industry. The Company’s petrochemical business is a custom formulator of specialty petrochemicals for the oil and gas industry and related services to the oil and gas industry. Since the products are formulated specifically to each location, the receipt of an order or purchase order starts the production process. Once the blending of the petrochemicals for the order takes place, the order is delivered to the well-site. When the containers of blended petrochemicals are either off-loaded at the well-site, or stored at the well-site, a delivery ticket is obtained, an invoice is generated and the Company recognizes revenue.

Revenue is recognized when title and risk of loss have transferred to the customer and when contractual terms have been fulfilled. Transfer of title and risk of loss occurs when the product is delivered, or service performed in accordance with the contractual terms. Revenue is recognized based on the credit agreement with the customer at the agreed upon price.

Basic and Diluted Loss Per Share

Basic and diluted earnings or loss per share (EPS) amounts in the consolidated financial statements are computed in accordance Accounting Standard Codification (ASC) 260 – 10 “Earnings per Share”, which establishes the requirements for presenting EPS. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS is based on the weighted average number of common shares outstanding and dilutive common stock equivalents. Basic EPS is computed by dividing net income or loss available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Potentially dilutive securities were excluded from the calculation of diluted loss per share, because their effect would be anti-dilutive.

Accounts Receivable and Allowance for Doubtful Accounts

The Company generally does not require collateral, and the majority of its trade receivables are unsecured. The carrying amount for accounts receivable approximates fair value.
 
Accounts receivable consisted of the following as of September 30, 2012 and December 31, 2011:

   
September 30,
2012
   
December 31,
2011
 
Trade receivables
 
$
2,608,875
   
$
2,070,334
 
Less: Allowance for doubtful accounts
   
(23,000
)
   
(149,401
)
Net accounts receivable
 
$
2,585,875
   
$
1,920,933
 

Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions.

 
7

 
Recently Issued Accounting Pronouncements

The Company does not expect that the adoption of recently issued accounting pronouncements will have a material impact on its financial position, results of operations, or cash flows.

Note 2 – Going Concern

The Company has had a history of net losses through the nine months ended September 30, 2012. This factor raises substantial doubt about the Company's ability to continue as a going concern. The unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's ability to continue operations will likely require additional capital. This condition raises substantial doubt about the Company’s ability to continue as a going concern. We expect cash flows from operating activities to improve, primarily as a result of an increase in revenue, although there can be no assurance thereof. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. If we fail to generate more significant positive cash flows or obtain additional financing, when required, we may have to modify, delay, or abandon some or all of our business and expansion plans.

Note 3 – Inventory

Inventory represents raw and blended chemicals and other items valued at the lower of cost or market with cost determined using the first-in first-out method, and with market defined as the lower of replacement cost or realizable value. Inventory consisted of the following as September 30, 2012 and December 31, 2011:

   
September 30,
2012
   
December 31,
2011
 
Raw materials
 
$
869,118
   
$
831,504
 
Finished goods
   
1,085,328
     
740,385
 
Total inventory
 
$
1,954,446
   
$
1,571,889
 
 
Note 4 – Long-Term Debt

On January 30, 2012, the Company purchased a vehicle by issuing debt of $59,744 with an annual interest rate of 6.4% and a term of 36 months and payments of $1,833 per month. On March 19, 2012 the Company purchased a vehicle by issuing debt of $50,328 with an annual interest rate of 5.9% and a term of 36 months and a monthly payment of $1,532.

On January 27, 2012, the Company received proceeds of $130,000 from the sale of 16% Convertible Subordinated Debentures (the “Debentures”). The Debentures are subordinate to all other secured debt of the Company, pay 16% interest per annum in cash quarterly and are convertible into the Company’s common stock by the investors at any time at a minimum conversion price per share of $.15. On March 1, 2013, June 1, 2013 and September 1, 2013, the Company shall redeem one quarter, one quarter and one half, respectively, of the face value of the balance of the Debentures in cash. In addition, the investors received 100% of the number of shares of common stock that the purchase amount would buy in warrants at the conversion price of $0.15, or a total of 866,667 warrants, with a 3-year term. The Company does not have any registration obligation in regard to the common stock. The Company analyzed the conversion option under ASC 815 and determined equity classification was appropriate. The Company then analyzed the conversion option under ASC 470-20 for consideration of a beneficial conversion feature and determined the option had intrinsic value on the date of issuance. The Company recorded a discount from the relative fair value of the warrants and the intrinsic value of the conversion option of $71,291. The Company valued the warrants using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.114; warrant term of 3 years; expected volatility of 156%; and discount rate of 0.32% and accounted for them as debt discount, which will be amortized over the term of the loan which expires September 1, 2013.

On May 7, 2012, the Company purchased vehicles by issuing debt of $106,253 with an annual interest rate of 6.4% and a term of 36 months and payments of $3,260 per month.

 
8

 
 
On May 25, 2012, the Company reached an agreement with a vendor to exchange a payable for a term debenture of $350,000 with an annual interest rate of prime plus 1.5% with a monthly principal payment of $10,000 plus accrued interest.

On May 29, 2012, the Company purchased a vehicle by issuing debt of $49,004 with an annual interest rate of 6.4% and a term of 36 months with payments of $1,500 per month.

On June 19, 2012 the company repaid $304,879 of notes payable. The effect of this transaction accelerated $39,794 of debt discount as additional amortization of debt discount.

On June 15, 2012, the Company purchased a vehicle by issuing debt of $46,115 with an annual interest rate of 4.74% and a term of 36 months with payments of $1,379.

On July 14, 2012, the Company purchased a vehicle by issuing debt of $57,082 with an annual interest rate of 5.89% and a term of 36 months with payments of $1,738.

On August 17, 2012, the Company purchased a vehicle by issuing debt of $46,651 with an annual interest rate of 4.74% and a term of 36 months with payments of $1,395.

On September 4, 2012, the Company purchased a vehicle by issuing debt of $40,451 with an annual interest rate of 5.89% and a term of 36 months with payments of $1,094.

Note 5 – Stockholders’ Equity

Common stock issued for services

On January 13, 2012, the Company issued 166,434 shares of its common stock to a vendor for settlement of accrued expenses related to services rendered. The shares were valued at $26,296 and $12,296 was recorded as stock based compensation and $14,000 as a reduction in Accrued expenses.

On April 3, 2012, the Company issued 218,182 shares of its common stock to a vendor for settlement of accrued expenses related to services rendered. The shares were valued at $19,636 and recorded as stock based compensation.
 
On July 6, 2012 the Company granted 5,000,000 shares of restricted stock to a service provider the shares were value at $435,000 on the date of the grant, 20% of the restricted stock vest per year on the anniversary date of the grant and $21,750 was recorded as stock based compensation for the period from grant date to September 30, 2012.

On July 10, 2012 the Company granted 6,500,000 shares of restricted stock to the Company’s Chief Executive Officer, the shares were valued at $650,000 on the date of the grant. The restricted stock vests at a rate of 20% per year on the anniversary date of the grant and $$32,500 was recorded as stock based compensation for the period from the grant date to September 30, 2012.

On July 10, 2012 the Company granted 550,000 shares of restricted stock to two employees, the shares were value at $55,000. 300,000 shares vested immediately and 250,000 vested on January 1, 2013, and $42,500 was recorded as stock based compensation for the period from the grant date to September 30, 2012.
 
On September 30, 2012, the Company issued 600,000 shares of its common stock to a vendor for settlement of accrued expenses related to services rendered. The shares were valued at $62,400 and recorded as stock based compensation.
 
For the nine month period ended September 30, 2012 the Company amortized $274,271 of stock based compensation resulting from stock and warrants issued in previous periods.

 
9

 

Warrants issued

The following table reflects a summary of Common Stock warrants outstanding and warrant activity during 2012:

   
Number of
Warrants
   
Weighted
Average Exercise
Price
   
Weighted
Average Term
(Years)
 
                   
Warrants outstanding at December 31, 2011
   
75,317,618
   
$
0.51
     
0.6
 
Granted during the period
   
42,455,667
     
0.20
     
2.76
 
Exercised during period
                       
Forfeited during the period
   
(46,658,572
)
   
0.40
         
Warrants outstanding at September 30, 2012
   
71,114,713
   
$
0.39
     
1.3
 

On January 27, 2012, as discussed in Note 4, the Company granted 866,667 warrants in conjunction with the issuance of 16% Convertible Subordinated Debentures.

On January 31, 2012 the Company granted 1,000,000 warrants for consulting services at an exercise price of $0.15. The Company valued the warrants at a fair value of $115,838 using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.10; warrant term of 3 years; expected volatility of 180%; and discount rate of 0.31%. The Company is amortizing the warrants over the one-year term of the agreement and recognized $78,604 of expense during the nine months ended September 30, 2012.

On June 19, 2012 the Company’s initiated a sale of units of restricted common stock and common stock purchase warrants in a private placement (the “Private Placement”). Each unit was for $50,000 and consisted of 625,000 shares of stock at $0.08, a warrant to purchase 937,500 shares of common stock at $0.15 for three years and a warrant to purchase 937,500 shares of common stock at $0.25 for three years. As of September 30, 2012 the Company had sold $1,068,000 in the Private Placement consisting of 13,350,000 shares of restricted common stock at a per share price of $0.08, common stock purchase warrants for the purchase of 20,025,000 shares of the Company’s common stock exercisable at a per share price of $0.15 and common stock purchase warrants for the purchase of 20,025,000 shares of the Company’s common stock exercisable at a per share price of $0.25. The common stock purchase warrants may be exercised for a period of 3 years. The Company granted  warrants for the purchase of 539,000 shares of the Company’s common stock exercisable at a per share price of $0.08 for services related to this Private Placement, each warrant maybe exercised for a period of 3 years and no expenses was recorded. The Company has a piggy-back registration obligation with respect to the common stock in the Private Placement.

Stock Option Awards

On July 10, 2012 the Company granted a total of 14,000,000 options to members of the Board of Directors, the options have a term of 10 years, an exercise price of $0.10 per share and vest at 20% per year and 250,000 options to a member of the Board of Directors, the option has an exercise price of $0.10 per share and vest immediately and used the Black-Scholes method to determine fair value. For the period from grant to September 30, 2012 $90,671 was recorded as stock based compensation.

The Company has recognized a compensation expense of $515,297 on the stock options granted in prior years that vested during the current period for the nine months ended September 30, 2012. The fair value of the unvested shares is $1,403,168 and has no intrinsic value as of September 30, 2012.

 
10

 
 
Stock option activity summary covering options is presented in the table below:

   
Number of
Shares
   
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Outstanding at December 31, 2011
   
25,600,000
   
$
0.14
     
8.85
 
Granted
   
14,250,000
   
$
0.10
     
9.83
 
Exercised
   
-
     
-
     
-
 
Expired/Forfeited
   
(859,000
)
   
0.15
     
9.15
 
Outstanding at September 30, 2012
   
38,991,000
   
$
0.12
     
7.25
 
Exercisable at September 30, 2012
   
21,323,000
   
$
0.12
     
6.83
 

LPC Agreement

On September 16, 2010, the Company signed a $5 million purchase agreement with Lincoln Park Capital Fund, LLC (“LPC”), an Illinois limited liability company. Upon signing the agreement, we received $100,000 from LPC as an initial purchase under the $5 million commitment in exchange for 666,667 shares of our common stock and warrants to purchase 666,667 shares of our common stock at an exercise price of $0.20 per share. The Company also issued 1,181,102 of shares of common stock as a commitment fee valued at $159,449.

The Company also entered into a registration rights agreement with LPC whereby the Company agreed to file a registration statement related to the transaction with the U.S. Securities & Exchange Commission (“SEC”) covering the shares that may be issued to LPC under the purchase agreement. After the SEC had declared effective the registration statement related to the transaction on December 22, 2010, the Company has the right, in its sole discretion, over a 30-month period to sell its shares of common stock to LPC in amounts up to $500,000 per sale, depending on certain conditions as set forth in the purchase agreement, up to the aggregate commitment of $5 million.

There are no upper limits to the price LPC may pay to purchase the Company’s common stock. The purchase price of the shares related to the future funding will be based on the prevailing market prices of the Company’s shares immediately preceding the time of sales without any fixed discount, and the Company will control the timing and amount of any future sales of shares to LPC. LPC shall not have the right or the obligation to purchase any shares of common stock on any business day that the price of our common stock is below $0.10. In addition, the Company will issue to LPC up to 1,181,102 shares pro rata as LPC purchases the remaining $4.9 million as additional consideration for entering into the purchase agreement. The purchase agreement may be terminated by the Company at any time at the Company’s discretion without any cost to the Company. Except for a limitation on variable priced financings, there are no financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the agreement.

On April 20, 2011, pursuant to the LPC agreement described herein, the Company delivered a regular purchase notice to LPC to purchase $25,000 of the Company’s common stock, or 193,996 shares. Subsequent to this transaction, there are remaining 14,812,030 additional shares that the Company may sell to LPC, 1,181,102 shares already issued as a commitment fee, and 1,175,076 additional commitment shares that the Company may issue on a pro rata basis as up to an additional $4,875,000 of the Company’s stock is purchased by LPC.

From January 1, 2012 through March 6, 2012, the Company delivered regular purchase notices for transactions with LPC to sell 1,195,625 common shares and received $125,000.  There have been no purchase notices delivered to LPC since March 6, 2012.

Sale of restricted shares

On June 19, 2012 the Company’s initiated a sale of units of restricted common stock and common stock purchase warrants in a private placement (the “Private Placement”). Each unit was for $50,000 and consisted of 625,000 shares of stock at $0.08, a warrant to purchase 937,500 shares of common stock at $0.15 for three years and a warrant to purchase 937,500 shares of common stock at $0.25 for three years. As of September 30, 2012 the Company had sold $1,068,000 in the Private Placement consisting of 13,350,000 shares of restricted common stock at a per share price of $0.08, common stock purchase warrants for the purchase of 20,025,000 shares of the Company’s common stock exercisable at a per share price of $0.15 and common stock purchase warrants for the purchase of 20,025,000 shares of the Company’s common stock exercisable at a per share price of $0.25. The common stock purchase warrants may be exercised for a period of 3 years. The Company granted  warrants for the purchase of 539,000 shares of the Company’s common stock exercisable at a per share price of $0.08 for services related to this Private Placement, each warrant maybe exercised for a period of 3 years. The Company has a piggy-back registration obligation with respect to the common stock in the Private Placement.

 
11

 

Note 6 – Related Party Transactions

As of December 31, 2011, the Company owed shareholders and management a total of $76,286. As of September 30, 2012, the Company had a balance due to shareholders and management totaling $55,542.

Note 7 – Sale leaseback of equipment

On June 1, 2012 the Company completed a sale leaseback transaction of certain equipment for $304,879 in accordance Accounting Standard Codification (ASC) 840 – 40 “Sales-Leaseback Transactions”, the gain was deferred. The lease was accounted for as a capitalized lease, a financing method, with monthly payments of $22,200 through November, 2014. The proceeds from the sale where used to repay the debt on the equipment, see note 4 June 19, 2012 above. The Company will continue to reflect the book value of the equipment and related accumulated depreciation remain on the balance sheet and no sale was recognized. The sales price of the equipment is recorded as a capitalized lease obligation with a portion of each lease payment includes interest expense.

 
12

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

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” in the Company’s Form 10-K, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Financial information contained in this quarterly report is prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our audited consolidated financial results on Form 10-K for December 31, 2011 and the related notes that appear elsewhere in this quarterly report. As used in this quarterly report, and unless otherwise indicated, the terms “we”, “us” and “our” mean ESP Resources, Inc., unless otherwise indicated.

Corporate History

We were incorporated on October 27, 2004, in the State of Nevada. Our principal offices are located at 9595 Six Pines Drive, Suite 6305, The Woodlands, TX 77380.

Effective September 28, 2007, we completed a merger with our subsidiary, Pantera Petroleum, Inc., a Nevada corporation. As a result, we changed our name from “Arthro Pharmaceuticals, Inc.” to “Pantera Petroleum, Inc.” In addition, effective September 28, 2007, we effected a sixteen (16) for one (1) forward stock split of our authorized, issued and outstanding common stock. As a result, our authorized capital increased from 75,000,000 common shares to 1,200,000,000 common shares with the same par value of $0.001. At that time, our issued and outstanding share capital increased from 6,970,909 common shares to 111,534,544 common shares.

In December 2008, the Company entered into an agreement with ESP Resources, Inc., a Delaware corporation (“ESP Delaware”), whereby the Company acquired 100% ownership of ESP Delaware in exchange for 292,682,297 common shares. As a result of this acquisition, we changed our name from “Pantera Petroleum, Inc.” to “ESP Resources, Inc.” On January 27, 2009, we effected a one (1) for twenty (20) reverse stock split of our common stock and received a new ticker symbol. The name change and reverse stock split became effective with the OTC Bulletin Board at the opening of trading on January 27, 2009 under the new symbol “ESPI” and a new CUSIP number of 26913L104.

On July 29, 2011 the shareholders decreased the authorized shares of our common stock from 1,200,000,000 shares to 350,000,000 shares and authorized a new class of stock, preferred stock having 10,000,000 shares of stock authorized at $.001 par value.

Any reference herein to “ESP Resources”, the “Company”, “we”, “our” or “us” is intended to mean ESP Resources, Inc., a Nevada corporation, including our wholly-owned subsidiaries including, ESP Petrochemicals, Inc. of Louisiana (“ESP Petrochemicals”), ESP Ventures, Inc. of Delaware (“ESP Ventures”), ESP Corporation, S.A., a Panamanian corporation (“ESP Corporation”) and ESP Payroll Services, Inc. of Nevada (“ESP Payroll”), unless otherwise indicated and two partially owned subsidiaries, ESP Advanced Technologies, Inc. of Delaware, and ESP Facility & Pipeline Services, Inc of Delaware.

 
13

 
 
Our Business

We are a custom formulator of specialty chemicals for the oil and gas industry. We offer analytical services and essential custom-blended chemicals for oil and gas wells, which improve production yields and overall efficiencies. Our mission is to provide applications of surface chemistry to service all facets of the fossil energy business via a high level of innovation. We focus our efforts on solving problems at the drilling site or well with a highly complex integration of chemicals and processes to achieve the highest level of quality petroleum output. Management believes our constant management of our chemical applications at the drilling site or well, continuous monitoring of the productivity and outflow levels of oil and gas and listening to our customers and their changing demands and applying our skills as chemical formulators enables us to measure the impact we have in our business.

We act as manufacturer, distributor and marketer of specialty chemicals and supply specialty chemicals for a variety of oil and gas field applications including killing bacteria, separating suspended water and other contaminants from crude oil, separating the oil from the gas, pumping enhancement, pumping cleaning, as well as a variety of fluids and additives used in the drilling and production process. At each well in production, there exists a number of factors that make each site unique. These include the depth of the producing formation, the bottom-hole temperature of the producing well, the size of the wellhead through which the producing fluids flow, the size and pressure ratings of the production equipment, including the separators, heater-treaters, compression equipment, size of production tubulars in the wellbore, size of the storage tanks on the customers’ location, and pressure ratings of the sales lines for the oil and gas products. Wells that are operating short distances from each other in the same field can have very different characteristics. This variance in operating conditions, chemical makeup of the oil, and the usage of diverse equipment requires a very specific chemical blend to be used if maximum drilling and production well performance is to be attained.

Our customers are typically oil and gas exploration customers who plan and finance the well, drill the well and then operate the well through the point of full depletion. Of the various stages involved in the development of an oil and gas well, we offer our products and services in principally two main areas: completion petrochemicals and production petrochemicals.

Completion Petrochemicals

Our completion petrochemicals are primarily used during the completion stage of oil or gas wells that are drilled in various shale formations in the United States. After a well is drilled, we deliver a specialized chemical equipment trailer, or chemical delivery unit, that is used in the pumping of chemicals during the hydraulic fracturing process. Hydraulic fracturing, or fracking, is a technology used to inject a fluid into a well to create fractures in the minerals containing the oil or gas. Usually the fluid is water, sand, and chemical additives. Our chemical delivery units pump chemicals to treat the fluids used in the completion of the oil and gas wells during the fracking process. Each unit consists of a trailer mounted pumping system with associated power generation components, a chemical supply trailer, safety and spill prevention equipment, communication devices, and computerized reporting equipment.

The units pump treatment chemicals to eliminate the bacteria contamination present in the fluids used in the fracking process. We have developed a specialized chemical formulation that is intended to provide for a longer term bacteria-contamination elimination time frame than what is currently supplied by our competitors. The longer term time frame is designed to provide our customers significant cost savings in the removal treatment of contaminants from the oil and gas well-stream once the well has been placed into production.

Once the completion work is concluded at the well, which typically takes between 2-5 days, our chemical delivery units are moved out of the location and sent back to the appropriate district office for the next completion job.

 
14

 
 
Production Petrochemicals

After a well has been completed and placed into production, we supply production chemicals and services that are designed to be administered throughout the life of the well. Through the utilization of over 100 base chemicals, we replicate well conditions, analyze the properties of the well, determine the precise mix of chemicals to treat the well and then inject the chemicals in small batches via our specialized equipment. Our production petrochemicals include, but are not limited to, drilling chemicals, waste remediation chemicals, cleaners and waste treatment chemicals as follows:

Surfactants that are highly effective in treating production and injection problems at the customer wellhead;
Well completion and work-over chemicals that maximize productivity from new and existing wells;
Bactericides that kill water borne bacterial growth, thus preventing corrosion and plugging of the customer wellhead and flowline;
Scale compounds that prevent or treat scale deposits;
Corrosion inhibitors, which are organic compounds that form a protective film on metal surfaces to insulate the metal from its corrosive environment;
Antifoams that provide safe economic means of controlling foaming problems;
Emulsion breakers, which are chemicals specially formulated for crude oils containing produced waters;
Paraffin chemicals that inhibit and/or dissolve paraffin to prevent buildup (their effectiveness is not diminished when used in conjunction with other chemicals); and
Water clarifiers that solve any and all of the problems associated with purifying effluent water and that improve appearance.

Our first goal is to solve our customers’ problem at the well and optimize drilling or production and, secondly, the sale of product. Typically, our service personnel gathers information at a well and enter this data into the analytical system at each of our six (6) respective district offices located in Scott, Louisiana; Pharr, Texas; Victoria, Texas; Guy, Arkansas; Longview, Texas; and Marlow, Oklahoma. The analytical system provides testing parameters and reproduces conditions at the wellhead. This allows our technical team and chemists to design and test a new chemical blend in a very short period of time. In many cases, a new blend may be in service at the well in as little as 24 hours.

Once the chemical blend has been formulated and determined, the chemical is placed in service at the wellhead of the customer by delivering a storage tank, called a “day tank,” at the customer’s well-site location and filling the tank with the custom blended chemicals. The tank is tied to a pressure pump that provides the pumping capacity to deliver the chemical into the wellhead for the customer. This unique process shortens the chemical development time frame from what might have been as long as two months or more to a few days or hours. Management believes that the service, response times and chemical products that the Company strives to provide its customers is a differentiating factor within the industry.

Competition

Currently, the market distribution is shared by very few large participants, namely, Baker Petrolite (a Baker Hughs company), Nalco Energy Services (an Ecolab company), Champion Technologies, Inc. (an Ecolab company), X-Chem, CESI Chemicals, Inc., BJ Services (a Baker Hughes company) and Multi-Chem Group (a Halliburton company). There are also many small to medium sized businesses that are regionally located. To be competitive in the industry, we will need to continually enhance and update our chemical processes and technologies that address the evolving needs of our customers for increased production efficiency. We continue to allocate resources toward the development of new chemical processes to maintain the efficacy of our technology and our ability to compete so that we can continue to grow our business.

Our competitive strategy is to provide better service and response times, combined with superior chemical solutions that can be translated into savings for our customers. We believe that we are able to solve these problems through the following competitive advantages:

Personalized service;
Expedited field analysis; and
Convenience and access to the best available market rates and products offered by our suppliers that we can produce and supply for our customers.

 
15

 
 
Additionally, new companies are constantly entering the market. This growth and fragmentation could also have a negative impact on our ability to obtain additional market share. Larger companies which have been engaged in this business for substantially longer periods of time may have access to greater financial resources and industry relationships. These companies may have greater success in recruiting and retaining qualified employees in specialty chemical manufacturing and marketing, which may give them a competitive advantage.

Government Approval and Regulation

We are subject to federal, state and local environmental laws, rules, regulations, and ordinances, including those concerning emissions and discharges, and the generation, handling, storage, transportation, treatment, disposal and import and export of hazardous materials (“Environmental Laws”). The operation of the Company's facilities and the distribution of chemical products entail risks under Environmental Laws, many of which provide for substantial remediation costs in the event of discharges of contaminants and fines and sanctions for violations. Violations of Environmental Laws could result in the imposition of substantial criminal fines and penalties against the Company and their officers and employees in certain circumstances. The costs associated with responding to civil or criminal matters can be substantial. Also, significant civil or criminal violations could adversely impact the Company's marketing ability in the region served by the Company. Compliance with existing and future Environmental Laws may require significant capital expenditures by the Company, although we do not anticipate having to expend significant resources to comply with any governmental regulations applicable to our current operations.

We are required to obtain licenses and permits from various governmental authorities. As we continue to grow we anticipate that we will be able to obtain all necessary licenses and permits to carry on the activities, and that we intend to comply in all material respects with the terms of such licenses and permits. However, there can be no guarantee that we will be able to obtain and maintain, at all times, all necessary licenses and permits required to undertake our proposed business development. In the event that we proceed with our operation without necessary licenses and permits, we may be subject to large fines and possibly even court orders and injunctions to cease operations.

Oil and gas operations in United States and elsewhere are also subject to federal and state laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Furthermore oil and gas operations in the United States are also subject to federal and state laws and regulations including, but not limited to: the construction and operation of facilities; the use of water in industrial processes; the removal of natural resources from the ground; and the discharge/release of materials into the environment. We are also subject to the laws and regulations which are generally applicable to business operations, such as business licensing requirements, income taxes and payroll taxes.

There can be no assurance that past or future operations will not result in the Company incurring material environmental liabilities and costs or that compliance with Environmental Laws will not require material capital expenditures by the Company, each of which could have a material adverse effect on the Company's results of operations and financial condition. The Company knows of no existing contamination sites where the company supplies petrochemicals for their current customer locations. The title for the chemicals that we supply to our customer base passes from us to the customer upon delivery of the chemical to the customer location. We have insurance that covers accidental spillage and cleanup at our blending location and for transportation to the customer location; however, the customer is responsible for the integrity of the chemical once the chemical blend is delivered to the receiving point of the customer.

Results of Operations

You should read the following discussion of our financial condition and results of operations together with the unaudited interim consolidated financial statements and the notes to the unaudited interim consolidated financial statements included in this quarterly report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

 
16

 
 
Three and Nine Month Period Ended September 30, 2012 Compared to Three and Nine Month Period Ended September 30, 2011

The following table summarizes the results of our operations during the nine months ended September 30, 2012 and 2011, and provides information regarding the dollar and percentage increase or (decrease) from 2011 to 2012:

   
Nine months Ended
September 30,
   
$
Increase
   
%
Increase
 
   
2012
   
2011
   
(Decrease)
   
(Decrease)
 
Sales
 
$
14,352,271
   
$
7,535,739
   
$
6,816,532
     
90
%
Cost of goods sold
   
7,854,109
     
3,589,977
     
4,264,132
     
119
%
Gross profit
   
6,498,162
     
3,945,762
     
2,552,400
     
65
%
Total general and administrative expenses
   
7,552,284
     
5,951,297
     
1,600,987
     
27
%
Depreciation and amortization expense
   
515,686
     
472,659
     
43,027
     
9
%
Gain on disposal of assets
   
(18,415
)
   
-
     
(18,415
)
     
%
Loss from operations
   
(1,551,393
)
   
(2,478,194
)
   
926,801
     
(37)
%
Total other income (expense)
   
(578,003
)
   
(272,106
)
   
(305,897
)
   
112
%
Net loss
 
$
(2,129,396
)
 
$
(2,750,300
)
 
$
620,904
     
(23)
%

The following table summarizes the results of our operations during the three months ended September 30, 2012 and 2011, and provides information regarding the dollar and percentage increase or (decrease) from 2011 to 2012:

   
Three Months Ended
September 30,
   
$
Increase
   
%
Increase
 
   
2012
   
2011
   
(Decrease)
   
(Decrease)
 
Sales
 
$
4,461,459
   
$
3,425,518
   
$
1,035,941
     
30
%
Cost of goods sold
   
2,248,453
     
1,626,194
     
622,259
     
38
%
Gross profit
   
2,213,006
     
1,799,324
     
413,682
     
23
%
Total general and administrative expenses
   
2,893,103
     
2,219,746
     
673,357
     
30
%
Depreciation and amortization expense
   
194,134
     
182,030
     
12,104
     
7
%
Gain on disposal of assets
   
(10,000
)
           
(10,000
)
       
Loss from operations
   
(864,231
)
   
(602,452
)
   
(261,779
)
   
43
%
Total other income (expense)
   
(220,661
)
   
(103,657
)
   
(117,004
)
   
113
%
Net loss
 
$
(1,084,892
)
 
$
(706,109
)
 
$
(378,783
)
   
(54)
%

Sales

Sales were $14,352,271 for the nine months ended September 30, 2012, compared to $7,535,739 for the same period in 2011, an increase of $6,816,532, or 90%. The increase was mainly due to increased sales volume from completion petrochemical sales and services to customers engaged in the hydraulic fracturing of oil and gas wells.  In addition, sales increased through increases in sales of production petrochemicals in the Southern Louisiana, South Texas and Southeastern Texas regions. The addition of field service technicians in the South Texas and Arkansas regions in previous quarters and their sales contacts resulted in a direct increase in sales volumes from these regions.

Sales were $4,461,459 for the three months ended September 30, 2012, compared to $3,425,518 for the same period in 2011, an increase of $1,035,941, or 30%.  The increase was mainly due to increased sales volume from completion petrochemical sales and services to customers engaged in the hydraulic fracturing of oil and gas wells. In addition, sales increased through increases in sales of production petrochemicals in the Southern Louisiana, South Texas and Southeastern Texas regions. The addition of field service technicians in the South Texas and Arkansas regions in previous quarters and their sales contacts resulted in a direct increase in sales volumes from these regions.

Cost of goods sold and gross profit

Cost of goods was $7,854,109, or 55% of net sales, for the nine months ended September 30, 2012, compared to $3,589,977, or 48% of net sales, for the same period in 2011. Gross profit was $6,498,162, or 45% of net sales, for the nine months ended September 30, 2012, compared to $3,945,762, or 52% of net sales, for the same period in 2011.  The 7% decrease in gross profit for the nine month period in 2012 is the result of new completion petrochemical sales from customers engaged in the hydraulic fracturing of oil and gas wells that have a lower gross profit margin than production petrochemical products.

 
17

 
 
Cost of goods was $2,248,453, or 50% of net sales, for the three months ended September 30, 2012, compared to $1,626,194, or 47% of net sales, for the same period in 2011. Gross profit was $2,213,006, or 50% of net sales, for the three months ended September 30, 2012, compared to $1,799,324, or 53% of net sales, for the same period in 2011. The 3% decrease in gross profit for the three month period in 2012 is the result of new completion petrochemical sales from customers engaged in the hydraulic fracturing of oil and gas wells that has a lower gross profit margin than production petrochemical products.

General and administrative expenses

General and administrative expenses increased by $1,600,987 for the nine months ended September 30, 2012, compared to the same period in 2011. The increase in general and administrative expenses was primarily due to increases in staff and additions in the Company’s facilities in the Victoria, Texas Region, development of international operations and approximately $630,000 in legal fees incurred as a result of certain litigation, namely the trade secret infringement lawsuit that the Company initiated in March 2012 to protect the Company’s trade secrets. The development of international operations included in the general and administrative expenses was $577,000 for the nine months ended September 30, 2012, compared to $226,000 for the same period in 2011.

General and administrative expenses increased by $673,357 for the three months ended September 30, 2012, compared to the same period in 2011. The increase in general and administrative expenses was primarily due to increases in staff and additions in the Company’s facilities in the Victoria, Texas Region, development of international operations and approximately $130,000 in legal fees incurred as a result of certain litigation, namely the trade secret infringement lawsuit that the Company initiated in March 2012 to protect the Company’s trade secrets. The development of international operations included in the general and administrative expenses was $256,000 for the three months ended September 30, 2012, compared to $226,000 for the same period in 2011.

Net loss

The Company’s net loss decreased to $(2,129,396) for the nine months ended September 30, 2012, as compared to a net loss of $(2,750,300) for the same period in 2011. The primary reason for the decrease in the net loss was due to a decrease, as a percentage of sales, in general and administrative expenses relating to the expansion of our sales from our existing facilities and, stock compensation expense and increase in the cost of additional infrastructure to support higher levels of sales in future periods and development of international operations.

The Company’s net loss increased to $(1,084,892) for the three months ended September 30, 2012, as compared to a net loss of $(706,109) for the same period in 2011. The primary reason for the increase in the net loss was due to a increase, as a percentage of sales in general and administrative expenses relating to the expansion of our sales from our existing facilities, stock compensation expense, the cost of additional infrastructure to support higher levels of sales in future periods and development of international operations.

Modified EBITDA

Modified Earnings before interest (including factoring fees), taxes, depreciation amortization and stock-based compensation (“Modified EBITDA”) is a non-GAAP financial measure. We use Modified EBITDA as an unaudited supplemental financial measure to assess the financial performance of our assets without regard to financing methods, capital structures, taxes or historical cost basis; our liquidity and operating performance over time in relation to other companies that own similar assets and that we believe calculate Modified EBITDA in a similar manner; and the ability of our assets to generate cash sufficient for us to pay potential interest costs. We also understand that such data are used by investors to assess our performance. However, the term Modified EBITDA is not defined under generally accepted accounting principles and Modified EBITDA is not a measure of operating income, operating performance or liquidity presented in accordance with generally accepted accounting principles. When assessing our operating performance or liquidity, investors should not consider this data in isolation or as a substitute for net income, cash flow from operating activities, or other cash flow data calculated in accordance with generally accepted accounting principles. Modified EBITDA for the three and nine months ended September 30, 2012 was $(164,142) and $136,709 compared to $103,641 and $(288,309), respectively for the same periods in 2011, a change of of $(267,783) and $391,950 respectively.
 
 
18

 

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net loss
 
$
(1,084,892
)
 
$
(706,109
)
 
$
(2,129,396
)
 
$
(2,750,300
)
Add back interest and factoring expense, net of interest income
   
211,181
     
95,272
     
517,556
     
262,998
 
Add back depreciation and amortization
   
194,134
     
182,030
     
515,686
     
472,659
 
Add back amortization debt discount
   
11,128
     
-
     
65,058
     
-
 
Add back stock-based compensation
   
504,307
     
532,448
     
1,149,925
     
1,726,334
 
Modified EBITDA
 
$
(164,142
)
 
$
103,641
   
$
118,829
   
$
(288,309
)
 
Cash Flow Used by Operating Activities

Operating activities provided cash of $75,659 for the nine months ended September 30, 2012, compared to use of cash of $(830,988) for the same period in 2011. The decrease in cash used for operations during the nine months ended September 30, 2012 was primarily due to an increase in accounts payable and the use of stock based compensation that were partially offset by increases in accounts receivable and inventory.

Cash Flow Used in Investing Activities

Investing activities used cash of $(763,297) for the nine month period ended September 30, 2012, compared to a use of cash of $(836,277) for the nine month period ended September 30, 2011. The net cash used in investing activities during the nine months ended September 30, 2012 was a result of the cash used for the acquisition of new delivery and field service vehicles and the purchase of additional field equipment including storage tanks, containment storage devices, and chemical delivery pumps.

Cash Flow Provided by Financing Activities

Financing activities provided cash of $906,957 for the nine months period ended September 30, 2012, compared to $1,400,287 for the nine month periods ended September 30, 2011. The net use of cash generated from financing activities during the nine months ended September 30, 2012, was a result of repayment of long-term debt and was offset by the proceeds from the sales of units of convertible debt of $130,000 and the sale of common stock of $1,188,360.

Liquidity and Capital Resources

As of September 30, 2012, our total assets were $8,715,663 and our total liabilities were $7,662,195. We had cash of $345,775, current assets of $5,155,682, and current liabilities of $6,025,821 as of September 30, 2012. We had negative working capital of $(870,139) on that date. We will require additional funds to implement our growth strategy. For this most recent quarter, we remained dependent on sales of our equity securities and debt financings to meet our cash requirements. We expect this situation to continue for the foreseeable future. While we anticipate further increases in operating cash flows, we will continue to require additional capital through equity financing and/or debt financing which may result in further dilution in the equity ownership of our shares. There is still no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on his investment in our common stock. Furthermore, we may continue to be unprofitable.

Working Capital

We estimate that our general operating expenses for the next twelve month period will increase as we continue to expand domestically and internationally. As reported on our results for the nine months period ended September 30, 2012, professional and consulting fees, administrative salaries, telephone, office and warehouse rent, and ongoing legal, accounting, and audit expenses to comply with our reporting responsibilities as a public company under the Securities Exchange Act of 1934, as amended will remain the same or may increase. Any increase in field operating expenses will be due to increases in field operating personnel, travel and international expenses as the demands from current and new and existing customers increase. Specifically, we expect to continue to increase the size of our operating personnel during 2012 and 2013 as we increase our presence in the Texas regions as well as expansion plans in place for increases in sales in the international market, Southeast Oklahoma and Arkansas regions.

 
19

 
 
Cash Requirements

Our plan of operations for the next 12 months involves the growth of our production and completion petrochemical business through the expansion of regional sales, and the research and development of new chemical and analytical services in areas of waste remediation, water treatment and specialty biodegradable cleaning compounds.  In addition, we plan to expand our business into other oil & gas services through acquisitions and strategic partnerships.  As of September 30, 2012, our company had cash of $345,775 and a working capital deficit of ($870,139).

We incurred a net loss of $(2,129,396) for the nine month period ended September 30, 2012. We estimate that our needs for additional capital to implement our growth plans for the next twelve month period to be $4,000,000 to $6,000,000. However, if our expansion efforts require more capital and operating expenses or capital expenditures exceed estimates, we will require additional monies during the next twelve months to execute our business plan. To date, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We expect this situation to continue for the foreseeable future. There can be no assurance that we will be successful in raising the required additional capital or that actual cash requirements will not exceed our estimates. These funds may be raised through equity financing and/or debt financing which may result in further dilution in the equity ownership of our shares. There is still no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on his investment in our common stock. Further, we may continue to be unprofitable in the foreseeable future.

We can offer no assurance that our company will generate cash flow sufficient to continue our growth, achieve consistently profitable operations or that our expenses will not continue to exceed our projections. If our expenses exceed estimates, we will require additional monies during the next twelve months to execute our business plan. There are no assurances that we will be able to obtain funds required for our continued operation. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down our operations.

Going Concern

Due to our net losses, negative cash flow and negative working capital as of December 31, 2011, our independent auditors included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern in their report on our audited financial statements for the year ended December 31, 2011.

Since inception, we have incurred losses and through September 30, 2012 totaling $16,606,856. Because of these historical losses, we will require additional working capital to develop our business operations. We intend to raise additional working capital through private placements, bank financing and/or advances from related parties or shareholder loans.

The continuation of our business is dependent upon obtaining further financing and achieving consistently profitable operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current or future stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

There are no assurances that we will be able to achieve a level of revenues adequate to generate profitability. To the extent that funds generated from operations and any private placements and/or bank financing are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to us. If adequate working capital is not available we may not be able grow our business and increase cash flow from our operations.

These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 
20

 
 
Off-Balance Sheet Arrangements

Our company has no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. Our company does not engage in trading activities involving non-exchange traded contracts.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operation are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There have been no changes to our critical accounting policies from those described in our annual report on Form 10-K for the year ended December 31, 2011.

ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T. – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this quarterly report, being September 30, 2012, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company’s management, including our President and Chief Executive Officer. Based upon that evaluation, our President and Chief Executive Officer concluded that the company’s disclosure controls and procedures are effective as of the end of the period covered by this report. There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our President and Chief Executive Officer, to allow timely decisions regarding required disclosure.
 
 
21

 

PART II - OTHER INFORMATION

ITEM 1. – LEGAL PROCEEDINGS

On March 2, 2012 the Company filed a trade secret infringement lawsuit to protect its rights against a former employee, a competitor and the officers of the competitor. The petition ESP Petrochemicals, Inc. V. Shane Cottrell, Platinum Chemicals, LLC, Ladd Naquin, Andjoe Lauer was filed in the district court of Victoria County, Texas 24th Judicial District and was amended on April 20, 2012. On October 1, 2012 we settled this suit. As a result of the settlement, the other parties must refrain from contact in specified areas with our customers and employees.

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

During the nine months ended September 30, 2012, the Company received proceeds of $130,000 from the sale of 16% Convertible Subordinated Debentures (the “Debentures”). The Debentures are subordinate to all other secured debt of the Company, pay 16% interest per annum in cash quarterly and are convertible into the Company’s common stock by the investors at any time at a minimum conversion price per share of $.15. On March 1, 2013, June 1, 2013 and September 1, 2013, the Company shall redeem one quarter, one quarter and one half, respectively, of the face value of the balance of the Debentures in cash. In addition, the investors received 100% of the number of shares of common stock that the purchase amount would buy in warrants at the conversion price of $0.15, or a total of 866,667 warrants, with a 3-year term.

On June 19, 2012 the Company’s initiated a sale of units of restricted common stock and common stock purchase warrants in a private placement (the “Private Placement”). Each unit was for $50,000 and consisted of 625,000 shares of stock at $0.08, a warrant to purchase 937,500 shares of common stock at $0.15 for three years and a warrant to purchase 937,500 shares of common stock at $0.25 for three years. As of September 30, 2012 the Company had sold $1,068,000 in the Private Placement consisting of 13,350,000 shares of restricted common stock at a per share price of $0.08, common stock purchase warrants for the purchase of 20,025,000 shares of the Company’s common stock exercisable at a per share price of $0.15 and common stock purchase warrants for the purchase of 20,025,000 shares of the Company’s common stock exercisable at a per share price of $0.25. The common stock purchase warrants may be exercised for a period of 3 years. The Company has a piggy-back registration obligation with respect to the common stock in the Private Placement.

Each purchaser of the Debentures and Private Placement represented to the Company that such purchaser is an “accredited investor” within the meaning of Rule 501 of Regulation D. We sold the Debentures in accordance with Rule 506 of Regulation D under the Securities Act of 1933, as amended. Proceeds were used for working capital to fund continuing operations.

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. – (REMOVED AND RESERVED)

ITEM 5. – OTHER INFORMATION

None.

 
22

 

ITEM 6. - EXHIBITS

Exhibit Number
 
Description
     
1.1
 
Licensing Agreement with Peter Hughes (incorporated by reference from our Registration Statement on Form SB-2 filed on April 18, 2006)
     
3.1
 
Articles of Incorporation (incorporated by reference from our Registration Statement on Form SB-2 filed on April 18, 2006)
     
3.2
 
Bylaws (incorporated by reference from our Registration Statement on Form SB-2 filed on April 18, 2006)
     
3.3
 
Articles of Merger filed with the Secretary of State of Nevada on September 19, 2007 and which is effective September 28, 2007 (incorporated by reference from our Current Report on Form 8-K filed on September 28, 2007)
     
3.4
 
Certificate of Change filed with the Secretary of State of Nevada on September 19, 2007 and which is effective September 28, 2007 (incorporated by reference from our Current Report on Form 8-K filed on September 28, 2007)
     
4.1
 
Regulation “S” Securities Subscription Agreement (incorporated by reference from our Registration Statement on Form SB-2 filed on April 18, 2006)
     
10.1
 
Share Purchase Agreement dated November 21, 2007 among our company, Pantera Oil and Gas PLC, Aurora Petroleos SA and Boreal Petroleos SA (incorporated by reference from our Current Report on Form 8-K filed on November 26, 2007)
     
10.2
 
Form of Advisory Board Agreement (incorporated by reference from our Current Report on Form 8-K filed on February 4, 2008)
     
10.3
 
Equity Financing Agreement dated February 12, 2008 with FTS Financial Investments Ltd. (incorporated by reference from our Current Report on Form 8-K filed on February 15, 2008)
     
10.4
 
Return to Treasury Agreement dated February 26, 2008 with Peter Hughes (incorporated by reference from our Current Report on Form 8-K filed on February 28, 2008)
     
10.5
 
Amending Agreement dated March 17, 2008 with Artemis Energy PLC, Aurora Petroleos SA and Boreal Petroleos SA (incorporated by reference from our Current Report on Form 8- K filed on March 19, 2008)
     
10.6
 
Subscription Agreement dated February 28, 2008 with Trius Energy, LLC (incorporated by reference from our Quarterly Report on Form 10-QSB filed on April 14, 2008)
     
10.7
 
Joint Venture Agreement dated February 24, 2008 with Trius Energy, LLC (incorporated by reference from our Quarterly Report on Form 10-QSB filed on April 14, 2008)
     
10.8
 
Second Amending Agreement dated July 30, 2008 among our company, Artemis Energy PLC (formerly Pantera Oil and Gas PLC), Aurora Petroleos SA and Boreal Petroleos SA (incorporated by reference from our Current Report on Form 8- K filed on August 5, 2008)
     
10.9
 
Amended and Restated Share Purchase Agreement dated September 9, 2008 among company, Artemis Energy PLC (formerly Pantera Oil and Gas PLC), Aurora Petroleos SA and Boreal Petroleos SA (incorporated by reference from our Annual Report on for 10-KSB filed on September 15, 2008)
     
10.10
 
Agreement dated October 31, 2008 with Lakehills Production, Inc. and a private equity drilling fund (incorporated by reference from our Current Report on Form 8-K filed on November 5, 2008)
     
10.11
 
Security Purchase Agreement for 16% Subordinated Convertible Debenture Agreement and warrants (incorporated by reference from our Current Report on Form 10-K filed on March 22, 2012)
     
10.12
 
Confidential Private Placement Memorandum for Accredited Investors Only dated May 15, 2012 and Warrant Agreement
     
14.1
 
Code of Ethics (incorporated by reference from our Annual Report on Form 10-KSB filed on August 28, 2007)
     
31.1*
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*
 
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
__________
*Filed herewith
 
 
23

 

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
ESP RESOURCES, INC.
 
       
Date: November 14, 2012
By:
/s/ David Dugas
 
   
David Dugas
 
   
Chief Executive Officer and Director
 
   
(Principal Executive Officer and Principal Financial Officer)
 

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

 
ESP RESOURCES, INC.
 
       
Date: November 14, 2012
By:
/s/ David Dugas
 
   
David Dugas
 
   
Chief Executive Officer and Director
 
   
(Principal Executive Officer and Principal Financial Officer)
 
       
Date: November 14, 2012
By:
/s/ Tony Primeaux
 
   
Tony Primeaux
 
   
Director
 
       
Date: November 14, 2012
By:
/s/ William M Cox
 
   
William M. Cox
 
   
Director
 
 
 
 
24