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ESPI > SEC Filings for ESPI > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for ESP RESOURCES, INC.

Form 10-Q for ESP RESOURCES, INC.


15-May-2014

Quarterly Report


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, 2013 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 1003 South Hugh Wallis Road Suite G-1 Lafayette, Louisiana 70508.

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 16 for 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 1 for 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 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 of which the Company ceased operations on June 11, 2013, ESP Advanced Technologies, Inc. of Delaware, and ESP Facility & Pipeline Services, Inc. of Delaware.


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 exist 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.


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' problems 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 4 respective district offices located in Rayne, Louisiana; Pharr, Texas; Victoria, Texas and Longview, Texas. 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.

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.


Continuing Operations for the three month period ended March 31, 2014 compared to three month period ended March 31, 2013

The following table summarizes the results of our operations during the three months ended March 31, 2014 and 2013, and provides information regarding the dollar and percentage increase or (decrease) from 2014 to 2013:

                                                        Three months ended               $                %
                                                            March 31,                Increase          Increase
                                                      2014             2013         (Decrease)        (Decrease)
Sales                                              $ 3,152,765     $  3,454,957     $  (302,192 )              (9 )%
Cost of goods sold                                   1,470,343        1,756,871        (286,528 )             (16 )%
Gross profit                                         1,682,422        1,698,086         (15,664 )              (1 )%
Total general and administrative expenses            1,858,104        2,437,040        (578,936 )             (24 )%
Depreciation and amortization expense                  180,000          231,800         (51,800 )             (22 )%
Loss from disposal of assets                            16,169                           16,169
Loss from operations                                  (371,851 )       (970,754 )       598,903               (62 )%
Total other income (expense)                          (384,458 )       (144,727 )      (239,731 )             166 %
Loss from continuing operations                    $  (756,309 )   $ (1,115,481 )   $   359,172               (32 )%

Sales

Sales were $3,152,765 for the three months ended March 31, 2014, compared to $3,454,957 for the same period in 2013, a decrease of $302,192, or 9%. The decrease was mainly due to a $1,357,000 decreased sales volume from completion petrochemical sales and services to customers engaged in the hydraulic fracturing of oil and gas wells. This decrease occurred as a result of a slowdown in fracking activity by certain of the Company's customers and closure of the Company's district office in Arkansas. In addition, as the Company's customers shifted their hydraulic fracturing activity to other shale regions where the Company did not have any district offices, the Company was not able to recapture that fracking activity.

Cost of Goods Sold and Gross Profit

Cost of goods was $1,470,343, or 47% of net sales, for the three months ended March 31, 2014, compared to $1,756,871 or 51% of net sales, for the same period in 2013. Gross profit was $1,682,422, or 53% of net sales, for the three months ended March 31, 2014, compared to $1698,086, or 49% of net sales, for the same period in 2013. The 2% increase in gross profit for the three month period in 2014 is the result of a decline in 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 product sales.

General and Administrative Expenses

General and administrative expenses decreased by $578,936 for the three months ended March 31, 2014, compared to the same period in 2013. The decrease in general and administrative expenses was primarily due to a reduction in legal costs related to the intellectual property suit that was settled in the fourth quarter of 2012, the closure of the Houston office in June 2013 and the approximately $165,000 reduction in stock compensation.

Net loss from continuing operations

The Company's net loss from continued operations decreased to $756,309 for the three months ended March 31, 2014, as compared to a net loss from continued operations of $1,115,481 for the same period in 2013. The primary reason for the decrease in the net loss was due to a cost reduction initiated by the Company in the second half of 2013.

Concentration

The Company has five major customers that together account for 63% of accounts
receivable at March 31, 2014 and 58% of the total revenues earned for the period
ended March 31, 2014.

               Accounts
              Receivable       Revenue

Customer A             19 %          13 %
Customer B             15 %          25 %
Customer C             10 %           6 %
Customer D             10 %           6 %
Customer E              9 %           8 %
                       63 %          58 %

The Company has three vendors that accounted for 54%, 13% and 12% of purchases for the three months ended March 31, 2014.

The Company has three major customers that together account for 47% of accounts receivable at March 31, 2013 and 59% of the total revenues earned for the period ended March 31, 2013.


               Accounts
              Receivable       Revenue

Customer A             24 %          17 %
Customer B             13 %          21 %
Customer C             10 %          21 %
                       47 %          59 %

The Company has two vendors that accounted for 36% and 18% purchases for the three months ended March 31, 2013.

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 is 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 months ended March 31, 2014 was $50,606 compared to ($503,477) for the same periods in 2013, with a change of $554,083.

                                                                       Three months ended March 31
                                                                        2014                 2013
Net loss                                                           $    (756,309 )      $ (1,288,393 )
Add back interest and factoring expense, net of interest income          175,896             185,185
Add back depreciation and amortization                                   180,000             239,262
Add back amortization debt discount                                      152,124             205,886
Add back stock-based compensation                                        233,069             397,682
Add back change in derivative liability                                   65,826            (236,068 )
Modified EBITDA                                                    $      50,606        $   (496,466 )

Cash Flow Used by Operating Activities

Operating activities provided cash of $218,514 for the three months ended March 31, 2014, compared to cash provided of $323,236 for the same period in 2013. The increase in cash provided by operations during the three months ended March 31, 2014 was primarily due to an increase in accrued expenses from related parties, accrued expenses, non-cash charges for change in derivative liability, and 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 $180,201 for the three month period ended March 31, 2014, compared to a use of cash of $143,669 for the three month period ended March 31, 2013. The increase in net cash used in investing activities during the three months ended March 31, 2014 was a result of the cash to acquire vehicle and equipment driven by the purchase of additional field equipment including storage tanks, containment storage devices, and chemical delivery pumps in the prior period for new customers.

Cash Flow Provided by Financing Activities

Financing activities provided cash of $89,972 for the three months ended March 31, 2014, compared to cash use of ($47,437) for the three months ended March 31, 2013. The net cash provided was generated from financing activities during the three months ended March 31, 2014 and was a result of net factoring advances reduced by repayment of debt and capital leases.


Liquidity and Capital Resources

As of March 31, 2014, our total assets were $6,339,596 and our total liabilities were $11,176,444. We had cash of $134,042, current assets of $3,872,098, and current liabilities of $9,804,661 as of March 31, 2014. We had working capital of ($5,932,563) on that date. We will require additional capital to fund our losses and working capital deficits and to grow our business to recapture our decline in sales. For this most recent quarter, we remained dependent on our working capital lines and extended credit terms with our vendors to meet our cash requirements. We expect this situation to continue for the foreseeable . . .

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