ITEM 1 - BUSINESS
This annual report contains forward-looking statements as that term is defined under applicable securities laws. 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”, that may cause our company’s 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.
Our financial statements are stated in United States dollars (US$) and are prepared in accordance with United States generally accepted accounting principles.
In this annual report, unless otherwise specified, all references to “common shares” refer to the common shares of our capital stock.
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”. Our new CUSIP number is 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 all of our subsidiaries unless otherwise indicated.
Our Business
Through our subsidiaries, we manufacture, blend, distribute and market specialty chemicals and analytical services to the oil and gas industry and also provide services for the upstream, midstream and downstream sectors of the energy industry, including new construction, major modifications to operational support for onshore and offshore production, gathering, refining facilities and pipelines designed to optimize performance and increase operators' return on investment.
ESP Petrochemicals, Inc.
Through our wholly-owned subsidiary ESP Petrochemicals, Inc. (“ESP Petro”), we offer analytical services and essential custom-blended oil and gas well chemicals 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 complex integration of chemicals and methods to achieve the highest level of quality petroleum output. Constant management of our chemical applications at the drilling site or well, continuous monitoring of the productivity and outflow levels of oil and gas, responding to customers’ changing demands and applying our skills as chemical formulators enable us to measure the impact we have in our business.
ESP Petro acts 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 that is 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 well head 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 the 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 to our customers 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 works 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 one hundred (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:
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Surfactants that are highly effective in treating production and injection problems at the customer well- head;
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Well completion and work-over chemicals that maximize productivity from new and existing wells;
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Bactericides that kill water borne bacterial growth, thus preventing corrosion and plugging of the customer well-head and flowline;
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Scale compounds that prevent or treat scale deposits;
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Corrosion inhibitors, which are organic compounds that form a protective film on metal surfaces to insulate the metal from its corrosive environment;
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Antifoams that provide safe economic means of controlling foaming problems;
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Emulsion breakers, which are chemicals specially formulated for crude oils containing produced waters;
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Paraffin chemicals that inhibit and/or dissolve paraffin to prevent buildup (their effectiveness is not diminished when used in conjunction with other chemicals); and
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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 may gather 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; 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 twenty-four (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 (2) 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.
ESP Facility and Pipeline Services, Inc.
Through our majority-owned subsidiary ESP Facility & Pipeline Services, Inc. (“ESP FPS”), we provide services for the upstream, midstream and downstream sectors of the energy industry, including new construction, major modifications to operational support for onshore and offshore production, gathering, refining facilities and pipelines designed to optimize performance and increase operators’ return on investment. Services include: asset management, gas dehydration unit management, operating personnel training, decommissioning and asset removal support services, nitrogen, air and compression services and other services, both onshore and offshore.
ESP KUJV Limited Joint Venture
ESP Resources, Inc., through its newly-formed, wholly-owned subsidiary, ESP Corporation, S.A., a company incorporated under the laws of Panama and having its registered office at Edificio Balboa Plaza, Oficina 522, Avenida Balboa, Panama, Republic of Panama, entered into a shareholders’ agreement with Komo Umbrella Joint Venture Limited, a company incorporated in Papua New Guinea and having its registered office at P. O. Box 6965 Boroko, NCD, Papua New Guinea (“KUJV”), to form a joint venture called ESP KUJV Limited (the “Agreement”). The purpose of ESP KUJV Limited is to pursue, undertake and realize business opportunities within the Komo project area. ESP KUJV Limited has the opportunity to be engaged by Exxon Mobil (PNG) Limited, the operator of a liquid natural gas project in Papua New Guinea, to carry out specialized design and construction works with respect to the development of the Komo international airfield (the “EM Projects”).
ESP KUJV Limited will be established under the Companies Act 1997 as promulgated under the laws of Papua New Guinea. The Agreement outlined the terms and conditions upon which ESP KUJV will operate to carryout its specialized design and construction works for the Exxon Mobil projects. ESP KUJV Limited will be owned thirty percent (30%) by KUJV and seventy percent (70%) by ESP, respectively.
Upon the formation of ESP KUJV Limited, the key operational commitments of KUJV to ESP KUJV Limited are to be the administrative manager and provide assistance in key operative areas for the Exxon Mobil projects including, but not limited to: (i) providing the services of administrative manager; (ii) assisting in the key operative areas; (iii) assisting in preparing ground reports and engineering and feasibility reports; (iv) assisting in providing tax and cost effective operational benefits; (v) assisting in the provision of general administration services; (vi) utilizing its resources to support in the areas of fire and life safety systems; (vii) providing technical and contractual support for preparation and award of task orders; (viii) preparing independent government estimate and/or cost analysis for each task order; (ix) negotiating the task orders and all required modifications according to the Registrant’s recommendations; (x) awarding the task orders and all required modifications according to the Registrant’s recommendations; (xi) providing engineering and construction services as requested; (xii) providing technical support or assistance for technical submittal reviews; (xiii) providing contract support after task order award; (xiv) providing quality assurance support as and when required or requested by the Registrant; (xv) providing accommodation/catering and camp services, light vehicles and associated services; (xvi) providing security for personnel and property and securing escort and/or transportation services; and (xvii) providing local labor recruitment and management.
Upon the formation of ESP KUJV Limited, the key operational commitments of the Registrant to ESP KUJV Limited are to provide the services of the operating manager for the Exxon Mobil projects with full responsibility for: (i) preparing and executing services; (ii) the receipt and tender of financing and acquisition; (iii) deployment of assets of ESP KUJV Limited; (iv) providing expert and experienced technical assistance; and (v) overseeing the day-to-day operations and management.
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., 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 due to the following competitive advantages:
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Personalized service;
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Expedited field analysis; and
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Convenience and access to the best available market rates and products that we can produce and identify for our customers that are currently offered by our suppliers.
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. We anticipate that we will be able to obtain all necessary licenses and permits to carry on the activities which we intend to conduct, 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 exploration and development or to place our properties into commercial production. 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 our 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.
Number of Employees
On December 31, 2012, we had 53 full-time employees. We expect to increase the number of employees as we implement our business objectives and expand our management team. None of our employees are represented by a labor union or covered by a collective bargaining agreement. The management of our company is comprised of a team of highly skilled and experienced professionals, and we focus on training and professional development for all levels of employees and on hiring additional experienced employees. We believe that our relations with our employees are good.
ITEM 1A
ITEM 1A - RISK FACTORS
The shares of our common stock are highly speculative in nature, involve a high degree of risk and should be purchased only by persons who can afford to lose the entire amount invested in the common stock. You should carefully consider the risks described below and the other information in this annual report before investing in our common stock. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
Our specialty chemical business will be dependent on the oil and gas industry which has historically been volatile and could negatively affect our results of operations.
Demand for our oil and gas field specialty chemical products and services depends in large part upon the level of exploration and production of oil and gas and the industry's willingness to spend capital on environmental and oil and gas field services, which in turn depends on oil and gas prices, expectations about future prices, the cost of exploring for, producing and delivering oil and gas, the discovery rate of new oil and gas reserves and the ability of oil and gas companies to raise capital. Domestic and international political, military, regulatory and economic conditions also affect the industry.
Prices for oil and gas historically have been volatile and have reacted to changes in the supply of and the demand for oil and natural gas, domestic and worldwide economic conditions and political instability in oil producing countries. No assurance can be given that current levels of oil and gas activities will be maintained or that demand for our services will reflect the level of such activities. Prices for oil and natural gas are expected to continue to be volatile and affect the demand for specialty chemical products and services such as ours. A material decline in oil or natural gas prices or activities could materially affect the demand for our products and services and, therefore, our financial condition.
Competition in the oil and gas services industry is very intense and there is no assurance that we will be successful in acquiring new customers over our competitors.
The oil and gas service industry is very competitive. We compete with numerous companies, including companies that are much larger and have substantially greater technical, financial and operational resources and staff. We are required to obtain licenses and permits from various governmental authorities. We anticipate that we will be able to obtain all necessary licenses and permits to carry on the activities which we intend to conduct, 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 continually operate our business.
The potential costs of environmental compliance in our petrochemical business could have a material negative economic impact on our operations and financial condition.
Our specialty chemical business is 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.
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.
The Company intends to conduct appropriate due diligence with respect to environmental matters in connection with future acquisitions, there can be no assurance that the Company will be able to identify or be indemnified for all potential environmental liabilities relating to any acquired business. Although the Company has obtained insurance and indemnities for certain contamination conditions, such insurance and indemnities are limited.
Operating hazards in our petrochemical business could have a material adverse impact on our operations and financial condition.
Our specialty chemicals operations are subject to the numerous hazards associated with the handling, transportation, blending, storage, sale, ownership and other activities relating to chemicals. These hazards include, but are not limited to, storage tank or pipeline leaks and ruptures, explosions, fires, chemical spills, discharges or releases of toxic substances or gases, mechanical failures, transportation accidents, any of which could materially and adversely affect the Company. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment, environmental damage and may result in suspension of operations.
The Company will maintain insurance coverage in the amounts and against the risks it believes are in accordance with industry practice, but this insurance will not cover all types or amounts of liabilities. The Company currently has spillage, transportation, and handling insurance. No assurance can be given either that (i) this insurance will be adequate to cover all losses or liabilities the Company may incur in its operations or (ii) the Company will be able to maintain insurance of the types or at levels that are adequate or at reasonable rates.
Any change to government regulation/administrative practices may have a negative impact on our ability to operate and/or our profitability.
The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter the ability of our company to carry on our business. The continued media attention toward the use of hydraulic fracturing of oil & gas wells by our customers could adversely impact governmental regulations in the states in which we provide our fracking chemicals and have a negative impact on our business.
The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.
We may be unable to retain key personnel and there is no guarantee that we could find a comparable replacement.
We may be unable to retain key employees or consultants or recruit additional qualified personnel. Our limited personnel means that we would be required to spend significant sums of money to locate and train new employees in the event any of our employees resign or terminate their employment with us for any reason. We are largely dependent on the continued service of our President and CEO, David Dugas. We may not have the financial resources to hire a replacement if we lost the services of Mr. Dugas. The loss of service of Mr. Dugas could therefore significantly and adversely affect our operations.
The specialty chemicals business is highly competitive and the competition may adversely affect our results of operations.
Our business faces significant competition from major international producers as well as smaller regional competitors. Our most significant competitors include major chemicals and materials manufacturers and diversified companies, a number of which have revenues and capital resources far exceeding ours. Substitute products also exist for many of our products. Therefore, we face substantial risk that certain events, such as new product development by our competitors, changing customer needs, production advances for competing products, price changes in raw materials, could result in declining demand for our products as our customers switch to substitute products or undertake manufacturing of such products on their own. If we are unable to develop and produce or market our products to effectively compete against our competitors, our results of operations may materially suffer.
We have certain concentrations within our customer base, and the loss certain customers could have a material adverse impact on our business.
As of December 31, 2012, we had a total of 46 customers, four of which are major customers that together account for 53% of accounts receivable at December 31, 2012 and 68% of the total revenues earned for the year ended December 31, 2012. The loss of one of our major customers would have a serious material negative economic impact on our company and our ability to continue. There is no guarantee that we could replace one of these customers and if we were able to replace them, there is no guarantee that the revenues would be equal.
Need for additional employees
The Company’s future success also depends upon its continuing ability to attract and retain highly qualified personnel. Expansion of the Company’s business and the management and operation of the Company will require additional managers and employees with industry experience, and the success of the Company will be highly dependent on the Company’s ability to attract and retain skilled management personnel and other employees. Competition for such personnel is intense. There can be no assurance that the Company will be able to attract or retain highly qualified personnel.
Competition for skilled personnel in the oil and gas services industry is significant. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees. The Company’s inability to attract skilled management personnel and other employees as needed could have a material adverse effect on the Company’s business, operating results and financial condition. The Company’s arrangement with its current employees is at will, meaning its employees may voluntarily terminate their employment at any time. The Company anticipates that the use of stock options, restricted stock grants, stock appreciation rights, and phantom stock awards will be valuable in attracting and retaining qualified personnel. However, the effects of such plan cannot be certain.
At the current time, our consolidated operations are not profitable.
From inception through to December 31, 2012, we have incurred aggregate losses of $19,559,166. To date we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements and have incurred losses totaling $5,081,732 for the year ended December 31, 2012. As of December 31, 2012, we had negative working capital of $2,596,895. There is no assurance that we will operate profitably or will generate positive cash flow in the future. In addition, our operating results in the future may be subject to significant fluctuations due to many factors not within our control, such as the general economic cycle, the market price of oil and gas and exploration and development costs. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that costs increase beyond our expectations, such as cost of products sold or research and development cost, or we encounter greater costs associated with general and administrative expenses or offering costs.
We are dependent on outside capital to continuously fund any cash flow deficits and expect this to continue until we are profitable.
Until we can reach a significant level of profitability, we will depend almost exclusively on outside capital to pay for the continued growth of our business. Such outside capital may include the sale of additional stock and/or commercial borrowing. Capital may not continue to be available if necessary to meet our continuing operational needs or, if the capital is available, that it will be on terms acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business and as a result may be required to scale back or cease operations of our business, the result of which would be that our stockholders would lose some or all of their investment.
A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.
We may never pay any dividends to shareholders.
We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
RISKS RELATED TO OUR COMMON STOCK
Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our common stock may be negatively impacted by factors which are unrelated to our operations.
Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is highly volatile. There is no assurance that a sufficient market will continue develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
The market for penny stocks has experienced numerous frauds and abuses that could inadvertently and adversely impact investors in our stock.
The Company is aware that that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
●
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
●
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
●
"Boiler room" practices involving high pressure sales tactics and unrealistic price projections by sales persons;
●
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
●
Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and the NASDAQ Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the NASDAQ Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.
Only one of our directors is an independent director. We do not currently have independent audit or compensation committees. Currently, our by-laws only allow for a total of three directors. As a result, these directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.
For all of the foregoing reasons and others set forth herein, an investment in our securities in any market that may develop in the future involves a high degree of risk.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 2
ITEM 2 - PROPERTIES
We own no real property and currently lease our office space. Our principal executive offices are located at 9595 Six Pines Drive, Suite 6305, The Woodlands, TX 77380. Our telephone number is (337) 706-7056.
Currently, we service our customers out of seven (7) district offices, which are all under lease. We also have long-term lease for various district offices in Pharr Texas, Longview Texas and Guy Arkansas. These leases have remaining terms from February 2014 to March 2014 with monthly rent of $2,400 to $4,000, or an aggregate monthly rent of $10,150.
The Company also has short-term leases on property in Dubai, United Arab Emirates and Houston, Texas.
In March 2008, the Company entered into a five-year lease requiring monthly payments of $8,750 on our main blending facility in Scott Louisiana. The Company has the option to renew the lease for a subsequent five-year term with monthly rent of $9,500. The Company also had the option to buy the facilities during the second year of the lease for the consideration of $900,000 which it had not exercised. The Company has the option to purchase the building during the remainder of the initial term of the lease for an increased amount.
The landlord agreed to construct a laboratory building on the premises and a tank filling area and the Company agreed to pay the landlord an additional $20,000 at the end of the initial five year lease period if it does not renew the lease for the second five year term. The Company amortized the additional costs over the initial period of the lease.
On August 15, 2012 the Company entered into a five-year lease requiring monthly payment ranging from $11,083 to $11,775 for our primary office in The Woodlands Texas.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
On January 24, 2011, the Securities and Exchange Commission filed a complaint in which the Company, along with Christopher Metcalf and Bozidar Vukovich, was named. The complaint alleges that the defendants in the complaint violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule 10b-5, 17. C.F.R §§ 240.10b-5. The only relief sought against the Company is a judgment enjoining the Company from violating those sections of the Securities Act, Exchange Act and Rule 10b-5 in the future. On October 18, 2011, the Company entered into a consent with the Securities and Exchange Commission which resolves any claims asserted in the complaint.
Turf Chemistry
On June 11, 2011, a former employee and shareholder of Turf Chemistry Inc. filed a suit against the Company in the United State District court for Southern district of Texas McAllen Division. The Suit is based on a number of allegations being made by Mr. Alfredo Ledesma personally and on behalf of his company, Turf Chemistry, Inc. (“Turf”) The primary allegation against ESP is that the Company has failed to pay the purchase price of Turf to Mr. Ledesma. A review of the Company’s financial records indicated that in fact funds were moved from the Company to the account held by Turf. Whether or not the funds ultimately made their way to Mr. Ledesma is not within the control of the Company. Mr. Ledesma also alleges that as a condition of the acquisition of Turf, the Company agreed to continue to rent certain properties and to employ Mr. Ledesma. Neither claim is supported by the purchase agreement. At this time, we have no reason to believe that any ancillary documents exist creating these obligations. Furthermore, Mr. Ledesma alleges that Mr. Primeaux owes an accounting of sales by him and a percentage of the same. This particular allegation does not include the Company directly. The current discovery does not appear to support this claim.
The Company believes the suit is without merit and will defend the suit.
Platinum Chemicals LLC
On March 2, 2012 the Company filed a trade secret infringement lawsuit to protect its rights against a former employee, a competitor and officers of the competitor. On November 21, 2012, an Agreed Final Judgment was entered in the lawsuit ESP Petrochemicals, Inc. (“ESP Petro”), vs. Shane Cottrell, Platinum Chemicals, LLC, Ladd Naquin, Joe Lauer, Patrick Williams, Ralph McClelland and Ronald Walling (the “Defendants”) against the Defendants. Under the terms of the Agreed Final Judgment, the Defendants cannot offer or sell any chemical product or related services to a number of entities or in conjunction with any operations within designated Texas Railroad Commission districts for specified periods of time as long as ESP Petro is in conformance with the terms of the Agreed Final Judgment. The name of the entities, the lists of designated districts and the specific time periods are delineated in the Agreed Final Judgment. Additionally, the Defendants are not to solicit or recruit any ESP Petro employees, they must turn over any “ESP Information” (as that term is described in the Agreed Final Judgment) and they cannot directly or indirectly, offer, market, advertise, promote or otherwise describe in any way a product to a customer, prospective customer or third party, as being derived from ESP Petro’s formula or an equivalent ESP Petro product.
We know of no other material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
ITEM 4
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Through written consent on March 8, 2013, shareholders approved the following matters:
1.
The registration of up to Fifty-Seven Million Nine Hundred Forty-Two Thousand Two Hundred Seventy-Eight (57,942,278) shares of Common Stock of the Company under a Form S-1 Registration Statement filed with the U.S. Securities and Exchange Commission.
2.
The adoption of the Amended and Restated Bylaws of the Company.
PART II
ITEM 5
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES
Our common shares were approved for quotation on the OTC Bulletin Board on April 16, 2007, and are currently quoted for trading under the symbol “ESPI”. The following quotations obtained from the OTC Bulletin Board reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission an may not represent actual transactions. The high and low bid prices of our common stock for the periods indicated below are as follows:
___________
(1)
OTC Bulletin Board quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions. The transfer agent and registrar for our common stock is American Stock Transfer and Trust Company, LLC. As of the date of this report, we had approximately 200 shareholders of record, not including those common shares held in street name.
Dividend Policy
No cash dividends have been paid by our company on our common stock. We anticipate that our company’s future earnings will be retained to finance the continuing development of our business. The payment of any future dividends will be at the discretion of our company’s board of directors and will depend upon, among other things, future earnings, any contractual restrictions, the success of business activity, regulatory and corporate law requirements and the general financial condition of our company.
Equity Compensation Plan Information and Stock Options
Stock Option Awards
On November 23, 2012, the Company granted a total of 13,000,000 options to members of the Board of Directors. The options have a term of 10 years, an exercise price of $0.09 per share and vest at 20% every six months. On November 23, 2012, the Company granted a 1,000,000 option to a member of the Board of Directors. The option has an exercise price of $0.09 per share and vests immediately. The options have a fair value of $1,148,570.The Company used the Black-Scholes method to determine fair value with the following assumptions: stock price on the measurement date of $0.08; warrant term of 2 years using the SEC safe harbor rules; expected volatility of 183% and discount rate of 0.27%.
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. The options have a fair value of $1,390,594. The Company used the Black-Scholes method to determine fair value with the following assumptions: stock price on the measurement date of $0.10; warrant term of 7 years using the SEC safe harbor rules; expected volatility of 183% and discount rate of 0.63%.
On October 1, 2011, through the Board of Directors, the Company granted non-statutory options to purchase 2,000,000 shares to a director/officer of the Company as part of a new employment agreement. These options were granted with an exercise price equal to $0.12 per share and vest immediately. The stock price on the grant date was $0.115 per share. The options have a fair value of $220,880. The options were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.115; warrant term of 5 years using the SEC safe harbor rules; expected volatility of 184% and discount rate of 0.87%.
On July 29, 2011 the Board of Directors approved the issuance of 400,000 stock options to various employees of the Company. The stock options have an expiration of ten years from the grant date and an exercise price of $0.14 which was the market price of the Company’s common stock on the grant date. The options have a fair value of $51,899 . The options were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.14; term of 10 years; expected volatility of 184% and discount rate of 1.50%. The stock price on the grant date was $0.14 per share. The options vest immediately.
On June 24, 2011, through the Board of Directors, the Company granted non-statutory options to purchase 1,200,000 shares to two employees. These options were granted with an exercise price equal to $0.15 per share. The options have a fair value of $122,557. The options were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.12; term of 5 years; expected volatility of 162%-189%% and discount rate of 0.74%. The stock price on the grant date was $0.12 per share. These options vest 25% each year on the anniversary of the grant date.
On June 1, 2011, through the Board of Directors, the Company granted non-statutory options to purchase 5,000,000 shares each to two directors (one of whom is also the CEO of the Company). These options were granted with an exercise price equal to $0.14 per share. The stock price on the grant date was $0.125 per share. The options have a fair value of $1,211,305. The options were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.125; warrant term of 6 years; expected volatility of 185% and discount rate of 1.60%. These options vest 20% on the commencement date, 20% on December 1, 2011 and 20% on the remaining 2 years anniversary of the vesting commencement date.
Stock option activity summary covering options is presented in the table below:
The 28,250,000 options that were granted during year 2012 had a weighted average grant-date fair value of $0.10 per share. During the year ended December 31, 2012, The Company recognized stock-based compensation expense of $1,043,708 related to stock options. As of December 31, 2012, there was approximately $2,054,000 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of approximately 3 years. The aggregate intrinsic value of these options was $0 at December 31, 2012.
The 13,600,000 options that were granted during year 2011 had a weighted average grant-date fair value of $0.14 per share. During the year ended December 31, 2011, The Company recognized stock-based compensation expense of $1,616,676 related to stock options. As of December 31, 2011, there was approximately $698,000 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of approximately 3 years. The aggregate intrinsic value of these options was $71,459 at December 31, 2011.
The fair value of the options granted during the years ended December 31, 2012 and 2011 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
__________
(1)
The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the option on date of grant.
(2)
Due to a lack of stock option exercise history, the Company uses the simplified method under SAB 107 to estimate expected term.
DIRECTOR COMPENSATION
Compensation of Directors
We currently have no formal plan for compensating our directors for their services in their capacity as directors, although we may elect to issue stock options to such persons from time to time. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our Board. Our Board may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board or a committee thereof.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2012 about the securities issued, or authorized for future issuance, under our equity compensation plans, including the 2011 Stock Option and Incentive Plan:
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following financial data is derived from, and should be read in conjunction with, the “Financial Statements” and notes thereto. Information concerning significant trends in the financial condition and results of operations is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Selected Historical Data
(1) Information on the results of operations for the years ended December 31, 2012 and 2011.
ITEM 7
ITEM 7 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Notice Regarding Forward Looking Statements
The information contained in Item 7 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This filing contains a number of forward-looking statements which reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.
Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the risks to be discussed in our Annual Report on form 10-K and in the press releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of the risks and factors which may affect our business. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Use of Generally Accepted Accounting Principles (“GAAP”) Financial Measures
We use GAAP financial measures in the section of this report captioned “Management’s Discussion and Analysis or Plan of Operation” (MD&A), unless otherwise noted. All of the GAAP financial measures used by us in this report relate to the inclusion of financial information. This discussion and analysis should be read in conjunction with our financial statements and the notes thereto included elsewhere in this annual report. All references to dollar amounts in this section are in United States dollars, unless expressly stated otherwise. Please see our “Risk Factors” for a list of our risk factors.
Overview
This subsection of MD&A provides an overview of the important factors that management focuses on in evaluating our businesses, financial condition and operating performance, our overall business strategy and our earnings for the periods covered.
Result of Operations
Year ended December 31, 2012 as Compared to Year ended December 31, 2011
The following table summarizes the results of our operations during years ended December 31, 2012 and 2011.
The following table summarizes the results of our operations during three months ended December 31, 2012 and 2011.
Revenues
Revenue for the year-ended December 31, 2012 was $18,086,765, compared to $11,132,243 for the same period in 2011, an increase of $6,954,522, or 62%. The increase was due to several factors including an expanded customer base in the Southern Louisiana, Southeastern Texas and Arkansas regions and an increase in sales volume as a result of increased demand for petrochemical sales and services to customers engaged in the hydraulic fracturing of oil and gas wells. In addition, the Company increased revenue to several of its existing customers through supply of additional production petrochemical products at its existing customer well-sites.
Revenue for the quarter-ended December 31, 2012 was $3,734,494, compared to $3,596,504 for the same period in 2011, an increase of $137,990, or 4%. The increase in the quarters first through third was 30%, 144%, 136% respectively. These increases were due to expanded sales coverage in each of the Company’s districts as well as increased sales volume from the addition of completion petrochemical sales and services to customers engaged in the hydraulic fracturing of oil and gas wells. In addition, the Company increased revenue to several of its existing customers through supply of additional production petrochemical products at its existing customer well-sites.
Gross Profit
The Company’s gross profit, as a percentage of revenue for the year, was 44% compared to 52% for the same period in 2011, a decrease of 8%. The decrease in gross margin results from of an increased portion of our business from completion chemicals which have a lower gross profit margin of 40% compared to production chemicals 54% gross profit margin.
The Company’s gross profit, as a percentage of revenue for the quarter, was 41% compared to 52% for the same period in 2011, a decrease of 11%. This change is the result of increased portion of our business from completion chemicals which have a lower gross profit margin.
General and Administrative Expenses
General and administrative expenses, net of amortization and depreciation, impairment of Turf Customer list and gain on de-recognition of contingent liability increased by $2,390,445, or 27% for the year, compared to the same period in 2011. The increase in expenses for the year is primarily due to the expansion of the Company’s operating personnel from 43 to 52 employees and the cost of international business development of $828,000 that the company spent on evaluating and developing certain international opportunities compared to $377,000 in the prior year and approximately; $690,000 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 and $352,000 in development of environmental markets, there were no comparable amounts in the prior fiscal year.
The stock based compensation included in the general and administrative expenses was $2,482,678 and $2,960,428 for the years ended December 31, 2012 and 2011, respectively.
The Company recognized an impairment of Turf Customer list in 2011 of $518,600, representing the decline in the revenues generated from the Turf Customer list and the Turf earn out. The Company recognized a gain on the de-recognition of contingent liability of $330,000. There were no comparable amounts in the current fiscal year.
General and administrative expenses, net of amortization and depreciation, impairment of Turf Customer list and gain on de-recognition of contingent liability, increased by $789,458, or 27%, for the quarter ended December 31, 2012, compared to the same period in 2011 due to the expansion in the Company’s operating personnel from 43 to 52 employees and the cost of international business development of $251,000 in quarter ended December 31, 2012 compared to $151,000 in the quarter ended December 31, 2011 to in evaluating and developing certain international opportunities; $60,000 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 and $244,000 in development of environmental markets, there were no comparable amounts in the quarter ended December 31, 2011.
The stock based compensation included in the general and administrative expenses was $1,314,873 and $1,234,094 for the quarter ended December 31, 2012 and 2011, respectively.
For the quarter ended December 31, 2011 the Company recognized an impairment of Turf Customer list of $518,600, representing the decline in the revenues generated from the Turf Customer list and a Turf earn out. The Company recognized a gain on the de-recognition of contingent liability of $330,000. There were no comparable amounts in the quarter ended December 31, 2012.
Net Loss
Net loss for the year ended December 31, 2012 was $5,081,732, an increase of $756,218 compared to a loss of $4,325,514 for the same period in 2011. The primary reason for the increase in the net loss was as a result of increase in change in derivative liability of $293,843 and as noted above the investment in international and environmental development during the year ended December 31, 2012.
Net loss for the quarter ended December 31, 2012 was $2,952,336, an increase of $1,377,122 compared to a loss of $1,575,214 for the same period in 2011. The primary reason for the increase in the net loss was as a result of increase in change in derivative liability of $293,843 and as noted above the investment in international and environmental development during the quarter ended December 31, 2012.
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, for comparability 2011 results have been restated to reflect factoring cost. 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 decreased from $60,944 for the three months ended December 31, 2011 to $(903,077) for the three months ended December 31, 2012. Modified EBITDA decreased from a loss of $138,046 for the year ended December 31, 2011 to a loss of $766,368 for the year ended December 31, 2012 and is calculated as follows:
Liquidity and Capital Resources
Cash
As of December 31, 2012, we had $70,214 of cash and cash equivalents, as compared to $126,456 as of December 31, 2011.
Cash Flow
The cash flow for the years ended December 31, 2012 and 2011 are summarized below:
Cash outflows from operations during the year ended December 31, 2012 amounted to $604,155 as compared to net cash outflows from operations of $1,012,766 in the same period of 2011. The decrease in cash outflow was due primarily to the increase in inventory, accounts receivable and prepaid expenses.
Our cash outflows used in investing activities during the year ended December 31, 2012 amounted to $828,977 as compared to $672,572 in the same period of 2011. Cash outflows for the purchase of fixed assets increased to $907,317 for the year ended December 31, 2012 as compared to $557,808 for the same period in 2011.
Our cash inflows from financing activities amounted to $1,376,890 in the year ended December 31, 2012 as compared to $1,280,504 in the same period of 2011. The decrease was principally from net factoring advance of $(326,354) in 2012 compared to $1,642,285 in 2011.
Working Capital
We estimate that our general operating expenses for the next twelve month period will increase from their current levels of 2013 for professional and consulting fees, salaries, travel, telephone, office and warehouse rent, and ongoing legal, accounting, and audit expenses to comply with our reporting responsibilities as a public company under the United States Exchange Act of 1934, as amended. Any increase in general operating expenses will be due to increases in field operating personnel as the demands from current and new customers increase. Specifically, we will be increasing the size of our operating personnel during 2013 as we increase our presence in the East and South Texas regions as well as expansion plans in place for increases in sales in the Southeast Oklahoma, Arkansas regions and international.
As of December 31, 2012, our working capital was $(2,596,895). We will require additional funds to implement our growth strategy. To date, we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. Even though we anticipate our net loss and negative cash flows to lessen over the coming quarters, we anticipate that we will have to continue to fund our net loss through equity financing, debt financing, or other sources, 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.
Cash Requirements
Our plan of operations for the next 12 months involves the growth of our completion and production petrochemical business through the expansion of district offices, regional sales and analytical services to new and existing customers. We estimate that our needs for additional capital for the next twelve month period to be $3,000,000. However, if our operating expenses or capital expenditures exceed estimates, we will require additional monies during the next twelve months to execute our business plan. As of December 31, 2012, our company had cash of $70,214 and working capital of $(2,596,895). We incurred a net loss of $5,081,732 for the year ended December 31, 2012.
We can offer no assurance that our company will generate cash flow sufficient to achieve profitable operations or that our expenses will not exceed our projections. 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 or perhaps even cease the operation of our business.
Going Concern
Due to our net losses, negative cash flow and negative working capital, in their report on our audited financial statements for the year ended December 31, 2012, our independent auditors included an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.
We have historically incurred losses, and through December 31, 2012 have incurred losses of $19,559,166 since our inception. 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, public offerings, bank financing and/or advances from related parties or shareholder loans.
There are no assurances that we will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations. To the extent that funds generated from operations and any private placements, public offerings 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 increase 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.
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.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures of our company. Although these estimates are based on management’s knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates.
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.
Environmental Costs
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or our company’s commitments to a plan of action based on the then known facts.
As of December 31, 2012, we have not incurred any environmental expenditures.
Derivatives
The valuation of our embedded derivatives and warrant derivatives are determined primarily by the multinomial distribution (Lattice) model. An embedded derivative is a derivative instrument that is embedded within another contract. In the case of a convertible note payable (the host contract), any right to convert the note by the holder, certain default redemption right premiums and a change of control premium (payable in cash if a fundamental change occurs) are each embedded derivative instruments. In accordance with ASC 815 “Accounting for Derivative Instruments and Hedging Activities”, as amended, these embedded derivatives are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. A warrant derivative liability is also determined in accordance with ASC 815. Based on ASC 815, warrants which are determined to be classified as derivative liabilities are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. The practical effect of this has been that when our stock price increases so does our derivative liability and resulting in a non-cash loss charge that reduces our earnings and earnings per share. When our stock price declines, we record a non-cash gain, increasing our earnings and earnings per share.
To determine the fair value of our embedded derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
The Company reviews its long-lived assets and identifiable finite-lived intangibles for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The first step of the impairment test, used to identify potential impairment, compares undiscounted future cash flows of the asset or asset group with the related carrying amount. If the undiscounted future cash flows of the asset or asset group exceed its carrying amount, the asset or asset group is not considered to be impaired and the second step is unnecessary. If such assets were considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the fair market value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the year ended December 31, 2011, we determined that the uncertainty surrounding the revenue stream of those assets acquired in the Turf acquisition was sufficient to trigger an impairment analysis. The undiscounted future cash flows of the customer list acquired in the Turf acquisition did not exceed its carrying value. Therefore, we completed a discounted cash flow model derived from internal budgets in assuming fair values for the impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures and resources, and liquidity and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair value. We have concluded that impairment had existed at December 31, 2011 and has recorded an impairment charge, measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value, of $518,600 for the year ended December 31, 2011.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company, as defined by Rule 229.10(f)(1) and are not required to provide the information required by this Item.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.
The following financial statements are filed as part of this annual report:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
ESP Resources, Inc.
The Woodlands, Texas
We have audited the accompanying consolidated balance sheets of ESP Resources, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2012 and 2011, and the consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ESP Resources, Inc. and its subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, The Company has incurred losses and negative cash from operations through December 31, 2012. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
/s/MaloneBailey, LLP
www.malone-bailey.com
Houston, Texas
March 29, 2013
ESP Resources, Inc.
Consolidated Balance Sheets
December 31, 2012 and 2011
The accompanying notes are an integral part of these consolidated financial statements.
ESP Resources, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2012 and 2011
The accompanying notes are an integral part of these consolidated financial statements.
ESP Resources, Inc.
Statement of Stockholders’ Equity (Deficit)
For the Years Ended December 31, 2012 and 2011
The accompanying notes are an integral part of these consolidated financial statements.
ESP Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
For the Years Ended December 31, 2012 and 2011
The accompanying notes are an integral part of these consolidated financial statements.
ESP Resources, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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 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. On December 19, 2012 the Company formed a partially owned subsidiary in Nevada, IEM, Inc.
On September 7, 2011 the Company became a 49% partner in a new entity, ESP Marketing, LLC. The Company management will direct the operations of the business and the Company will receive 80% of the profits. On July 11, 2012 the Company became a 60% partner in a new entity ESP Facility and Pipeline Services, Inc. The Company management will direct the operations of the business and the Company will receive 60% of the profits. All significant inter-company balances and transactions have been eliminated in the consolidation.
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 subsidiaries indicated above, unless otherwise indicated.
Nature of the Business
The Company’s current business through its subsidiary ESP Petrochemicals Inc. sells and blends chemicals for use in the oil and gas industry to customers primarily located in the Gulf of Mexico and Gulf States region. ESP Resources previously was in the business of acquisition and exploration of oil and gas properties in North and South America. ESP Delaware, which was incorporated in Delaware in November, 2006, was formed as a holding company for ESP Petrochemicals, Inc. On June 15, 2007, ESP Delaware acquired all of the stock of ESP Petrochemicals Inc.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
The Company reviews its long-lived assets and identifiable finite-lived intangibles for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The first step of the impairment test, used to identify potential impairment, compares undiscounted future cash flows of the asset or asset group with the related carrying amount. If the undiscounted future cash flows of the asset or asset group exceed its carrying amount, the asset or asset group is not considered to be impaired and the second step is unnecessary. If such assets were considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the fair market value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the year ended December 31, 2011, the Company determined that the uncertainty surrounding the revenue stream of those assets acquired in the Turf acquisition was sufficient to trigger an impairment analysis. The undiscounted future cash flows of the customer list acquired in the Turf acquisition did not exceed its carrying value. Therefore, the Company completed a discounted cash flow model derived from internal budgets in assuming fair values for the impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures and resources, and liquidity and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flow is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair value. The Company has concluded that impairment had existed at December 31, 2011 and has recorded an impairment charge, measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value, of $518,600 for the year ended December 31, 2011. No such impairment exists for the year ended December 31, 2012.
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of ESP Resources and its wholly-owned and partially owned subsidiaries for the years ended December 31, 2012 and 2011. All significant inter-company transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company had $70,214 and $126,456 cash and cash equivalents at December 31, 2012 or 2011, respectively.
Restricted Cash
Under the terms of the Factoring payable, the Company may obtain advances up to 100 percent of eligible accounts receivable, subject to a 0.75 percent per 15 days factoring fee, with ten percent held in a restricted cash reserve account, which is released to the Company upon payment of the receivable.
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 December 31, 2012 and 2011:
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.
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.
As of December 31, 2012 and 2011, inventory consisted of the following:
Property and equipment
Property and equipment of the Company is stated at cost. Expenditures for property and equipment which substantially increase the useful lives of existing assets are capitalized at cost and depreciated. Routine expenditures for repairs and maintenance are expensed as incurred.
Depreciation is provided principally on the straight-line method over the estimated useful lives ranging from five to ten years for financial reporting purposes.
Intangible assets - Customer list
The Customer list carrying values are being amortized over a five-year period. Amortization expense for the years ended December 31, 2012 and 2011 was $0 and $182,940, respectively. Additionally, the asset was impaired during the year ended December 31, 2011 see the discussion of Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed above.
Derivatives
The valuation of our embedded derivatives and warrant derivatives are determined primarily by the multinomial distribution (Lattice) model. An embedded derivative is a derivative instrument that is embedded within another contract, which under the convertible note (the host contract) includes the right to convert the note by the holder, certain default redemption right premiums and a change of control premium (payable in cash if a fundamental change occurs). In accordance with Accounting Standards Codification ("ASC") 815 “Accounting for Derivative Instruments and Hedging Activities”, as amended, these embedded derivatives are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. A warrant derivative liability is also determined in accordance with ASC 815. Based on ASC 815, warrants which are determined to be classified as derivative liabilities are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. The practical effect of this has been that when our stock price increases so does our derivative liability and resulting in a non-cash loss charge that reduces our earnings and earnings per share. When our stock price declines, we record a non-cash gain, increasing our earnings and earnings per share. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
● Level 1 -
unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
● Level 2 -
inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
● Level 3 -
unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
To determine the fair value of our embedded derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.
The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2012.
Income Taxes
In accordance with ASC 740 “Accounting for Income Taxes”, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
Concentration
The Company has four major customers that together account for 53% of accounts receivable at December 31, 2012 and 68% of the total revenues earned for the year ended December 31, 2012.
The Company has two vendors that accounted for 68% and 11% of purchases during 2012.
The Company has three major customers that together account for 61% of accounts receivable at December 31, 2011 and 57% of the total revenues earned for the year ended December 31, 2011.
The Company has two vendors that accounted for 53% and 16% of purchases during 2011.
The Company places its cash and cash equivalents with financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. From time to time, the Company’s cash balances exceeded FDIC insured limits. At December 31, 2012, the Company’s uninsured cash balance was $0.
Revenue and Cost Recognition
The Company through its wholly owned subsidiary, ESP Petrochemicals, Inc., is a custom formulator of petrochemicals for the oil & gas industry. Since the products are specific to each location, the receipt of an order or purchase order starts the production process. Once the blending takes place, the order is delivered to the land site or dock. When the containers of blended petrochemicals are off-loaded at the dock, or they are stored on the land site, a delivery ticket is obtained, an invoice is generated and Company recognizes revenue. The invoice is generated based on the credit agreement with the customer at the agreed-upon price. ESP Facilities and Pipeline Services, Inc. is a pressure test service provider for the oil & gas industry. The Company provides labor and equipment to pressure test and service pipes and values. The company invoices the Customer based on the hours provided and invoices the customer for those hours during the service period and recognizes the revenue at the time of service.
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 in accordance with the contractual shipping terms, generally to a land site or dock. Revenue is recognized based on the credit agreement with the customer at the agreed upon price.
Advertising
Advertising costs are charged to operations when incurred. Advertising expense for the year ended December 31, 2012 and 2011 were $38,392 and $8,330, respectively.
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.
Business Segments
The Company operates on one segment in one geographic location the United States of America and therefore segment information is not presented.
Fair Value of Financial Instruments
The carrying amounts of the company’s financial instruments including accounts payable, accrued expenses, and notes payable approximate fair value due to the relative short period for maturity these instruments.
Environmental Costs
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or the Company’s commitments to a plan of action based on the then known facts.
The Company incurred no environmental expenses during the years ended December 31, 2012 and 2011, respectively.
Reclassification
Certain accounts in the prior period were reclassified to conform to the current period financial statements presentation.
Note 2 - Going Concern
At December 31, 2012, the company had cash and cash equivalents of $70,214 and deficit working capital of $2,596,895. The Company believes that its existing capital resources may not be adequate to enable it to execute its business plan. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. The Company estimates that it will require additional cash resources during 2013 based on its current operating plan and condition.
The Company expects 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 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 positive cash flow 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 - Factoring Payable
On May 24, 2011, ESP Petrochemical Inc. (EPPI) entered into a Account Receivable Financing agreement with Crestmark Commercial Capital Leading LLC, with an initial term of six months and renewing semi-annually thereafter. The agreement is in the subsequent renewal period. The Company may obtain advances up to 100 percent of eligible accounts receivable, subject to a 0.75 percent per 15 days factoring fee, with ten percent held in a reserve account, which is released to the Company upon payment of the receivable. The agreement is subject to a master note, which limits borrowing to $2,000,000. The master note is payable upon demand, or if no demand is paid, with monthly payments of interest at 1.5%. All outstanding principal plus accrued unpaid interest is due on maturity of the note or when the related invoice is collected. The master note is secured by all inventory, accounts, general intangibles, and equipment of the ESPI. On March 2, 2012 Crestmark increased the borrowing limit to $3,000,000. On August 1, 2012 Crestmark increased the borrowing limit to $4,000,000.The total borrowing under the agreement at December 31, 2012 and 2011 was $1,315,931 and $1,642,285 respectively with $136,358 and $192,198 respectively held in restricted cash in the consolidated balance sheets.
Note 4 - Property and equipment
Property and equipment includes the following at December 31, 2012 and 2011:
Depreciation expense was $709,524 and $456,087 for the year ended December 31, 2012 and 2011, respectively.
In the year ended December 31, 2012 the Company disposed of $149,717 of equipment, receiving proceeds of $22,500 resulting in a gain of $18,415. In the year end December 31, 2011 the Company tender of $345,875 of equipment on new equipment no gain or loss waas incurred.
Note 5- Long Term Debt
Long term debt consisted of the following at December 31, 2012 and 2011:
Maturities are as follows:
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 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.
On May 25, 2012, the Company reached an agreement with a vendor to exchange a payable for a term debenture of $450,000 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 $35,951 with an annual interest rate of 5.89% and a term of 36 months with payments of $1,094.
On October 24, 2012, the Company purchased a vehicle by issuing debt of $35,948with an annual interest rate of 4.24% and a term of 36 months with payments of $1,067.
On October 20, 2012, the Company purchased equipment by issuing debt of $81,422 with an annual interest rate of 7.15% and a term of 36 months with payments of $2,522.
On November 24, 2012, the Company purchased a vehicle by issuing debt of $39,039 with an annual interest rate of 4.24% and a term of 36 months with payments of $1,159.
On December 5, 2012, the Company purchased a vehicle by issuing debt of $50,722 with an annual interest rate of 4.24% and a term of 36 months with payments of $1,505.
On February 15, 2011, the Company purchased certain vehicles by issuing secured debt of $102,402 with an annual interest rate of 7.9% and a term of 48 months. On March 11, 2011 the Company purchased certain vehicles by issuing debt of $166,387 with an implied interest rate of 3.0% and a term of 48 months. On March 15, 2011 the Company purchased a vehicle by issuing debt of $62,067 with an implied interest rate of 3.0% and a term of 60 months.
In April, 2011 the Company purchased certain vehicles by issuing secured debt of $76,507 with annual interest rate of 3% and a term of 60 months and $42,275 with annual interest of 7.9% and a term of 60 months.. In May, 2011 the Company purchased vehicles by issuing debt of $95,074 with an annual interest rate of 3% and a term of 60 months.
In May 2011 the Company terminated an employee who was also a former shareholder in Turf. At that time the Company allowed the employee to retain certain vehicles which were acquired by the Company from Turf however the registration remained in the name of Turf. The associated bank loans on those vehicles also remained in the name of Turf. At the time of termination the Company canceled the remaining debt and recognized a contingent liability of approximately $11,000 for the difference between the fair value of the vehicles and the debt.
On June 3, 2011 the Company issued secured debt of $75,000 with an annual interest rate of 10% and a term of 24 months. The debt is secured by the specific assets acquired with the debt. As part of the consideration for making the loan the Company issued 225,000 shares of its common stock with a value of $29,250 which has been treated as a debt discount to the loan and is being amortized over the term of the loan.
On July 14, 2011 the Company purchased certain vehicles by issuing secured debt of $75,000 with an annual interest rate of 10% and a term of 24 months. The debt is secured by the specific assets acquired with the debt.
On July 15, 2011 the Company purchased certain vehicles by issuing secured debt of $75,000 with an annual interest rate of 10% and a term of 24 months. The debt is secured by the specific assets acquired with the debt.
On July 20, 2011 the Company purchased certain equipment by issuing secured debt of $31,690 with annual interest rate ranges of 10.5% and 12.0% and a term of 36 months.
On July 28, 2011 the Company purchased certain vehicles by issuing secured debt of $116,416 with an annual interest rate of 6.74% and a term of 36 months.
On August 13, 2011 the Company purchased certain vehicles by issuing secured debt of $60,229 with an annual interest rate of 7.74% and a term of 60 months.
On September 13, 2011 the Company purchased certain vehicles and equipment by issuing secured debt of $120,000 with an annual interest rate of 10% and a term of 24 months. The debt is secured by the specific assets acquired with the debt. As part of the consideration for making the loan the Company issued 120,000 shares of its common stock with a value of $15,000 which has been treated as a debt discount to the loan and is being amortized over the term of the loan.
On October 4, 2011, the Company borrowed $40,225 for the purchase of a vehicle. The note bears interest at 5.9% per year, is secured by the vehicle purchased with an annual interest rate of 5.9% and a term of 36 months.
On October 28, 2011, the Company borrowed $38,733 for the purchase of a vehicle. The note has an implied interest of 3.0% per year, is secured by the vehicle purchased with an annual interest rate of 3.0% and a term of 36 months.
On October 28, 2011 the Company purchased certain vehicles and equipment by issuing secured debt of $120,000 with an annual interest rate of 10% and a term of 24 months. As part of the consideration for making the loan the Company issued 120,000 shares of its common stock with a value of $19,550 which has been treated as a debt discount to the loan and is being amortized over the term of the loan.
On November 2, 2011, the Company purchased a vehicle by issuing secured debt of $34,058 with an annual interest rate of 6.4% and a term of 36 months.
On November 21, 2011, the Company purchased a vehicle by issuing secured debt of $39,540 with an implied interest of 3.0% and a term of 36 months.
On November 30, 2011, the Company purchased a vehicle by issuing secured debt of $62,684 with an annual interest of 6.4% and a term of 36 months.
Note 6 - Capitalized leases
ESP Petrochemicals leases certain office equipment, warehouse equipment special purpose equipment and vehicles under capital leases. Long term capitalize lease consisted of the following at December 31, 2012:
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 5 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.
On June 16, 2011 the Company leased a vehicle by issuing capital lease of $64,213 with a term of 52 months and monthly payment of $1,625.
On October 12, 2011 the Company leased office equipment by issuing capital lease of $10,140 with a term of 24 months and monthly payment of $260.
On December 15, 2011 the Company leased special purpose equipment by issuing capital lease of $108,853 with a term of 36 months and quarterly payment of $11,108.
The future payments under the capital lease are as follows:
Note 7 - Convertible debentures
The following reflect the Convertible debentures for the year ended December 31.
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 November 14, 2012, the Company received proceeds of $1,000,000 from the sale of 16% Convertible Subordinated Debentures. The Debentures are due on March 1, 2014. The aggregate principal amount of the combined Debentures is One Million Dollars ($1,000,000) with an interest rate of Sixteen Percent (16%) per annum. The interest is payable quarterly on March 1st, June 1st, September 1st, and December 1st, beginning on March 1, 2013. The Debentures are convertible at any time after the original issue date at a conversion price of $0.085 per share, subject to adjustments. The Company recorded a discount from the relative fair value of the conversion feature and the intrinsic value of the conversion option of $421,715. The Company estimated the fair value of these derivatives using a multinomial Distribution (Lattice) valuation model with the following assumptions: stock price on the measurement date of $0.07; term of 1.5 years; expected volatility between 112% 159%; and discount rate of 0.22% and accounted for them as debt discount, which will be amortized over the term of the loan which expires March 1, 2014. The Company analyzed the conversion option under ASC 815 and determined and recorded $449,840 derivative liability. The Company, in its sole discretion, may choose to pay interest in cash, shares of Common Stock, or in combination thereof. At the Company’s election, it may, at any time after the Six (6) month anniversary of the Transaction’s closing date, deliver a notice to the holders to redeem all of the then outstanding principal amount of the Debentures for cash. In the event the Company defaults, the outstanding principal amount of the Debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the debenture holders’ election, immediately due and payable 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 $0.09, or a total of 11,764,706 warrants with a 5-year term. The Company recorded a discount from the relative fair value of the warrants and the intrinsic value of the conversion option of $208,685. The Company estimated the fair value of these derivatives using a multinomial Distribution (Lattice) valuation model with the following assumptions: stock price on the measurement date of $0.07; warrant term of 5 years; expected volatility between 112%-593%; and discount rate of 0.63% and accounted for them as debt discount, which will be amortized over the term of the loan which expires March 1, 2014. The Company analyzed the warrants under ASC 815 and determined and recorded a $222,603 derivative liability.
The Debentures are secured by the remaining unencumbered assets of the Company. The Company’s subsidiary companies guaranteed the security agreement by agreeing to act as surety for the payment of the Debentures.
As further consideration for the Debentures, the Company issued a combined total of Four Million (4,000,000) shares of common stock to the investors, the Company recorded as a debt discount $299,600 at issuance and will amortize the debt discount over the term of the debt. For the year ended December 31, 2012 the Company amortized $5,912. The Company shall take all actions necessary to nominate and recommend shareholder approval for the appointment of One (1) director selected by Hillair Capital Management LLC to ESP’s Board of Directors. In conjunction with this debenture the Company paid $70,000 of professional fees and record these fees as debt discount to be amortized over the term of the debenture. The Company determined that the Debenture and warrant had derivative features and derivative liabilities were establish for each (see Note 8).
Note 8 - Derivative liability
The November 14, 2012 16% convertible debenture included down-round provisions reduce the exercise price of a warrant and convertible instrument as required by ASC 815 “Derivatives and Hedging”. If the company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. The Company evaluated whether its warrants and convertible debt instruments contain provisions that protect holders from declines in its stock price or otherwise could result in modification of either the exercise price or the shares to be issued under the respective warrant agreements. The Company determined that a portion of its outstanding warrants and conversion instrument contained such provisions thereby concluding they were not indexed to the Company’s own stock and therefore a derivative instrument.
The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at November 14, 2012 is as follows:
The Company estimated the fair value of these derivatives using a multinomial Distribution (Lattice) valuation model. The fair value of these warrant and debenture liabilities at November 14, 2012 was $693,043 the Company recorded as derivative liability.
The range of significant assumptions which the Company used to measure the fair value of warrant liabilities (a level 3 input) at December 31, 2012 is as follows:
The Company estimated the fair value of these derivatives using a multinomial Distribution (Lattice) valuation model. The fair value of these warrant liabilities at December 31, 2011 was $0 and at December 31, 2012 was $924,243. The change in fair value of derivative liabilities of $293,843 was included in the consolidated statement of operations for the year ended December 31, 2012.
As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
● Level 1 -
unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
● Level 2 -
inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
● Level 3 -
unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
To determine the fair value of our embedded derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.
Note 9 - Income taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded the valuation allowance due to the uncertainty of future realization of federal and state net operating loss carryforwards. The deferred income tax assets are comprised of the following at December 31:
At December 31, 2012, the Company had net operating loss carryforwards of approximately $10,346,000. The net operating loss carryforwards expire in 2019 through 2032.
The valuation allowance was increased by $1,877,000 during the year ended December 31, 2012. The current income tax benefit of $4,242,000 and $2,365,000 generated for the years ended December 31, 2012 and 2011, respectively, was offset by an equal increase in the valuation allowance. The valuation allowance was increased due to uncertainties as to the Company’s ability to generate sufficient taxable income to utilize the net operating loss carryforwards and other deferred income tax items.
The Company's ability to utilize the net operating loss carryforwards in future years will be significantly limited in accordance with the provisions of Section 382 of the Internal Revenue Code, because of the changes in ownership that have occurred in the prior years. The Company's NOL may be further limited should there be any further changes in ownership. As defined in Section 382 of the Internal Revenue Code, the Company who has undergone, or may undergo in the future, a greater than fifty percent ownership change as a result of financing initiatives. Consequently, there may be limitations on the amount of the Company's NOLs which may be utilized to offset future taxable income in any one year.
The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2012, the Company has no unrecognized uncertain tax positions, including interest and penalties.
Note 10 - Stockholders’ Equity
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.
During the year ended December 31, 2011, we received proceeds of $765,440, net of $66,560 in cash finder’s fees, from the sale of 11,885,713 units in a private placement. Each unit consisted of one share of common stock, one warrant for the purchase of a share of common stock at an exercise price of $0.25 for a period of eighteen months, and one warrant for the purchase of a share of common stock at an exercise price of $0.75 for a period of one year beginning on the first anniversary of the issuance of the warrant. The warrants were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.05-$0.17; warrant term of 1-2 years; expected volatility of 156%-158% and discount rate of .33%-2.61%. We issued finder fee warrant of 905,578 with a fair value of $126,140. This warrant has an exercise price of $0.0735 and a term of 3 years. The warrant was valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.12; warrant term of 3 years; expected volatility of 158%; and discount rate of 0.22%. The proceeds were allocated as follows:
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 $43,500 was recorded as stock based compensation for the period from grant date to December 31, 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 $65,000 was recorded as stock based compensation for the period from the grant date to December 31, 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. $55,000 was recorded as stock based compensation for the period from the grant date to December 31, 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.
On October 19, 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 $60,000 and recorded as stock based compensation.
On October 24, 2012 the Company granted 3,050,000 shares of restricted stock to an employee. The shares vested immediately were valued at $274,500 and was recorded as stock based compensation for the period.
On November 14, 2012, the Company issued 4,000,000 shares of its common stock as part of the inducement for the 16% Convertible debenture. The shares were valued at $299,600 and recorded as Debt Discount and will be amortized over the 18 month term of the debenture.
On November 20, 2012, the Company issued 150,000 shares of its common stock to a vendor for settlement of accrued expenses related to services rendered. The shares vest immediately and were valued at $12,000 and recorded as stock based compensation.
On November 23, 2012 the Company granted 5,000,000 shares of restricted stock to an officer. The shares vest immediately and were value at $400,000 and was recorded as stock based compensation for the period.
On December 6, 2012, the Company issued 200,000 shares of its common stock to a vendor for settlement of accrued expenses related to services rendered. The shares vest immediately and were valued at $20,000 and recorded as stock based compensation.
On November 23, 2012 the Company granted 250,000 shares of restricted stock to an employee. The shares vest immediately and were value at $20,000 and was recorded as stock based compensation for the period.
For the year ended December 31, 2012 the Company amortized $1,475,982 of stock based compensation resulting from stock and warrants.
In January and March 2011, the Company issued 325,000 shares of its common stock to a vendor for settlement of payable related to services rendered during the year. The shares were valued at $51,750.
On June 1, 2011 the Company entered into a 3 year consulting agreement. Per the terms of the agreement, the Company is to pay $3,250 per month and issued 1,500,000 shares of common stock and 2,000,000 warrants. The shares had a fair value of $187,500 and the warrants had a fair value using the Black Sholes valuation model of $98,289 and have recognized these amount as stock based compensation expense.
On June 24, 2011 the Company entered into a 3 month consulting agreement. The company issued 230,000 shares of common stock with a fair value of $27,600 and has recognized this amount as stock based compensation expense.
On June 27, 2011 the company entered into a 1 year consulting agreement. Per the terms of the agreement, the Company is to pay a monthly fee of $7,500 and issue 810,000 shares of common stock which are fair valued at $97,200. On November 11, 2011 amended the previous agreement terminating the consulting agreement and agreeing to reduce the number of shares to 405,000 shares which vested immediately. The Company accounted for this change as a cancelation and reissuance of shares and recognized compensation expense of $68,850 on these shares as of December 31, 2011.
In June 2011, the Company issued 400,000 shares of its common stock to vendors and certain employees for services rendered. The shares were valued at $48,000 and recorded as stock compensation expense.
On July 6, 2011 the Company agreed with a vendor to convert $55,000 of payables by issuing 761,111 shares of the Company stock and incurring a loss on settlement of payable related to services rendered during the year of $41,991, the fair value of the shares on conversion was $96,991.
On October 1, 2011, the Company entered into a consulting agreement with a vendor and issued 2,500,000 common shares a fair value of $287,500 and has recognized this amount as stock based compensation expense as consideration.
On October 1, 2011, the Company issued 2,050,000 shares and 2,000,000 options to officers and lenders with a fair value of $235,750 and $220,880 respectively and has recognized this amount as stock based compensation expense.
On October 28, 2011 the Company purchased certain vehicles and equipment by issuing debt of $120,000 with an annual interest rate of 10% and a term of 24 months. As part of the consideration for making the loan the Company issued 170,000 shares of its common stock with a value of $19,550 which has been treated as a debt discount to the loan and is being amortized over the term of the loan.
On November 7, 2011, the Company entered into a agreement with a vendor to convert $39,846 of payable by issuing 215,384 shares of Company common stock and incurring a loss on settlement of payable related to services rendered during the year $11,846, the fair value of stock was $51,692.
On December 16, 2011 the Company entered into a lease financing agreement with Veterans Capital by issuing 400,000 common shares as consideration with a fair value of $49,800 and recognized as stock based compensation. The agreement also issued warrants the Company for 1,000,000 shares of common stock with a exercise price of $0.25 per share. The warrants had a fair value of $122,237 valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.13; warrant term of 5 years; expected volatility of 180%; and discount rate of 0.86%.
As compensation for the lease financing agreement on December 16, 2011 the Company converted a payable of $62,250 for 500,000 common shares. The placement fee agreement also issued warrants the Company for 333,333 shares of common stock with a exercise price of $0.15 per share. The warrants had a fair value of $29,174 valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.13; warrant term of 3 years; expected volatility of 167%; and discount rate of 0.42% and has recognized this amount as stock based compensation expense.
Warrants issued
The following table reflects a summary of Common Stock warrants outstanding and warrant activity during 2012 and 2011:
The Common Stock warrants expire in years ended December 31 as follows:
On January 27, 2012, as discussed in Note 5, 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 $78,604 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.
On November 14, 2012, as discussed in Note 5, the Company granted 11,764,706 warrants in conjunction with the issuance of 16% Convertible Subordinated Debentures.
Stock Option Awards
On November 23, 2012, the Company granted a total of 13,000,000 options to members of the Board of Directors. The options have a term of 10 years, an exercise price of $0.09 per share and vest at 20% every six months. On November 23, 2012, the Company granted an additional 1,000,000 option to a member of the Board of Directors. The option has an exercise price of $0.09 per share and vests immediately. The options have a fair value of $1,055,381.The Company used the Black-Scholes method to determine fair value with the following assumptions: stock price on the measurement date of $0.08; warrant term of 2 years using the SEC safe harbor rules; expected volatility of 183% and discount rate of 0.27%.
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 an additional 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. The options have a fair value of $1,360,823. The Company used the Black-Scholes method to determine fair value with the following assumptions: stock price on the measurement date of $0.10; warrant term of 7 years using the SEC safe harbor rules; expected volatility of 183% and discount rate of 0.63%.
On July 29, 2011 shareholders approved the 2011 STOCK OPTION AND INCENTIVE PLAN which authorized up to 5,000,000 options shares. Under the plan the exercise price per share for the Stock covered by a Stock Option granted pursuant shall not be less than 100 percent of the Fair Market Value on the date of grant. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the option price of such Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the grant date. The term of each Stock Option shall be fixed but no Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. In the case of an Incentive Stock Option that is granted to a Ten Percent Owner, the term of such Stock Option shall be no more than five years from the date of grant.
On June 1, 2011, through the Board of Directors, the Company granted non-statutory options to purchase 5,000,000 shares each to two directors (one of whom is also the CEO of the Company). These options were granted with an exercise price equal to $0.14 per share. The stock price on the grant date was $0.125 per share. The options have a fair value of $1,211,305. The options were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.125; warrant term of 6 years; expected volatility of 185% and discount rate of 1.60%. These options vest 20% on the commencement date, 20% on December 1, 2011 and 20% on the remaining 2 years anniversary of the vesting commencement date.
On June 24, 2011, through the Board of Directors, the Company granted options to purchase 1,200,000 shares to two employees. These options were granted with an exercise price equal to $0.15 per share. The options have a fair value of $122,557. The options were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.12; term of 5 years; expected volatility of 162%-189%% and discount rate of 0.74%. The stock price on the grant date was $0.12 per share. These options vest 25% each year on the anniversary of the grant date.
On July 29, 2011 through the Board of Directors, the Company granted options to purchase 400,000 stock options to various employees of the Company. The stock options have an expiration of ten years from the grant date and an exercise price of $0.14 which was the market price of the Company’s common stock on the grant date. The options have a fair value of $51,899 which was fully expensed on the date of grant. The options were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.14; term of 5 years; expected volatility of 184% and discount rate of 1.50%. The stock price on the grant date was $0.14 per share. The options vest immediately.
On October 1, 2011, through the Board of Directors, the Company granted options to purchase 2,000,000 shares to a director/officer of the Company as part of a new employment agreement. These options were granted with an exercise price equal to $0.12 per share and vest immediately. The stock price on the grant date was $0.115 per share. The options have a fair value of $220,880 which was fully expensed on the date of grant. The options were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.115; warrant term of 5 years; expected volatility of 184% and discount rate of 0.87%.
Stock option activity summary covering options is presented in the table below:
The 28,250,000 options that were granted during year 2012 had a weighted average grant-date fair value of $0.12 per share. During the year ended December 31, 2012, The Company recognized stock-based compensation expense of $1,043,708 related to stock options. As of December 31, 2012, there was approximately $2,054,000 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of approximately 3 years. The aggregate intrinsic value of these options was $123,200 at December 31, 2012.
The 13,600,000 options that were granted during year 2011 had a weighted average grant-date fair value of $0.14 per share. During the year ended December 31, 2011, The Company recognized stock-based compensation expense of $1,616,676 related to stock options. As of December 31, 2011, there was approximately $698,041 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of approximately 3 years. The aggregate intrinsic value of these options was $605,000 at December 31, 2011.
The fair value of the options granted during the years ended December 31, 2012 and 2011 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
__________________
(1)
The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the option on date of grant.
(2)
Due to a lack of stock option exercise history, the Company uses the simplified method under SAB 107 to estimate expected term.
LPC Agreement
On September 16, 2010, ESP signed a $5 million purchase agreement with Lincoln Park Capital Fund, LLC (“LPC”), an Illinois limited liability company. Upon signing the agreement, ESP received $100,000 from LPC as an initial purchase under the $5 million commitment in exchange for 666,667 shares of ESP common stock and warrants to purchase 666,667 shares of ESP common stock at an exercise price of $0.20 per share and a five year term. The relative fair value of the 666,667 shares of ESP common stock and warrants was $52,488 and $47,512, respectively and was determined using a volatility of 158%, a risk free interest rate of .26% and a stock measurement price of $0.13. The Company also issued 1,181,102 of shares of common stock as a commitment fee valued at $159,449.
ESP 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 has declared effective the registration statement related to the transaction, 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. The agreement was not renewed.
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 $4.9 million of 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 ESP 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 21, 2011, December 17, 2011 and December 22, 2011 the Company exercised the put option to sell 193,996, 206,859 and 223,387 common shares, respectively, at $25,000 per put option.
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.
Note 11 - 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.
Note 12 - Commitments and Contingencies
The Company leases certain offices, facilities, equipment, and vehicles under non-cancelable operating leases at various dates through 2014. At December 31, 2012, future minimum contractual obligations were as follows:
On August 15, 2012 the Company entered into a five-year lease requiring monthly payment ranging from $11,083 to $11,775 for our primary office in The Woodlands Texas.
In October 2010, the Company entered into a three year commercial lease of a building requiring monthly payments of $3,750.
In March 2010, the Company entered into two, three year commercial leases of a building requiring monthly payments of $4,000 and $2,400, respectively.
On November 1, 2009, ESP Resources purchased certain assets and liabilities of Turf. The assets and liabilities acquired related to Turf’s activities in the United States. Turf operates in the same industry as ESP Resources and ESP Petrochemicals.
In March 2008, the Company entered into a five-year commercial lease of a building requiring monthly payments of $8,750. The Company had the option to renew the lease for a subsequent five-year term with monthly rent of $9,500. The Company also had the option to buy the facilities during the second year of the lease for the consideration of $900,000 which the Company did not exercise. If the Company elects not to purchase the building during the second year of the lease, it has the option to purchase the building during the remainder of the initial term of the lease for an amount that increase at $25,000 per year from the initial lease period.
The landlord agreed to construct a laboratory building on the premises and a tank filling area, and the Company agreed to pay the landlord an additional $20,000 at the end of the initial five year lease period if it does not renew the lease for the second five year term. The Company will amortize the additional costs over the initial period of the lease.
The acquisition of Turf was accounted for using purchase accounting as ESP Resources acquired substantially all of the assets, debts, employees, intangible contracts and business of Turf. Turf’s results of operations and cash flows are included in the accompanying consolidated financial statements from the date of acquisition.
The purchase price of $1,172,972 includes the assumption of bank and other debts of Turf totaling $203,742. On November 1, 2009, ESP Resources paid $75,530 in cash and issued 2,000,000 shares of common stock of ESP Resources Inc. The Company paid Turf an additional $263,700 during 2010. The fair value of the stock on the grant date is $280,000. The purchase included the assumption of debt and assets including inventory, fixed assets, vehicles, and supplies in exchange for cash and shares. The acquisition price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The Company determined that assets acquired included an intangible asset associated with the customer list for Turf’s existing customer relationships. The customer list was valued at $914,700 and has an estimated life of five years. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
As part of the acquisition agreement, ESP Resources agreed to issue an aggregate number of shares of its common stock to Turf determined as follows:
a)
If the sale of Turf’s products results in at least $1,500,000 in revenue for the one year period beginning on January 1, 2010 (the “First Earnout Period”), not including any revenue from ESP Resources or any of its other affiliates (the “First Revenue Earnout Criteria”), then Turf shall be entitled to receive an aggregate of such number of shares of the Company’s common stock as equals the quotient obtained by dividing (i) the difference between the total revenue from the sale of Turf’s products during the First Earnout Period minus $1,500,000 (ii) the average trading price of the Company’s common stock over the fifteen day period immediately preceding the last day of the First Earnout Period. The First Revenue Earnout Criteria was not achieved.
b)
If the sale of Turf’s products for the one year period beginning on the first day following the First Earnout Period and ending on the first anniversary of the First Earnout Period (the “Second Earnout Period”) results in revenue greater than the revenue earned in the First Earnout Period, not including any revenue from ESP Resources or any of its other affiliates (the “Second Revenue Earnout Criteria”), then Seller shall be entitled to receive an aggregate of such number of shares of the Company’s common stock as equals the quotient obtained by dividing (i) the quotient of (A) the difference between the total revenue from the sale of Turf’s products during the Second Earnout Period minus the revenue from the Sale of Turf’s products during the First Earnout Period divided by (B) one and thirty-three one hundredths (1.33), by (ii) the average trading price of the Company’s common stock over the fifteen day period immediately preceding the last day of the Second Earnout Period (the “Second Year Earnout Shares”).
c)
If the sale of Turf’s products for the one year period beginning on the first day following the Second Earnout Period and ending on the first anniversary of the Second Earnout Period (the “Third Earnout Period”) results in revenue greater than the revenue earned in the Second Earnout Period, not including any revenue from ESP Resources or any of its other affiliates (the “Third Revenue Earnout Criteria”), then Turf shall be entitled to receive an aggregate of such number of shares of the Company’s common stock as equals the quotient obtained by dividing (i) the quotient of (A) the difference between the total revenue from the sale of Turf’s products during the Third Earnout Period minus the revenue from the sale of Turf’s products during the Second Earnout Period divided by (B) two, by (ii) the average trading price of Company’s common stock over the fifteen day period immediately preceding the last day of the Third Earnout Period (the “Third Year Earnout Shares”).
d)
If the sale of Turf’s products for the one year period beginning on the first day following the Third Earnout Period and ending on the first anniversary of the Third Earnout Period (the “Fourth Earnout Period”) results in revenue greater than the revenue earned in the Third Earnout Period, not including any revenue from the ESP Resources or any of its other affiliates (the “Fourth Revenue Earnout Criteria”), then Turf shall be entitled to receive an aggregate of such number of shares of the Company’s common stock as equals the quotient obtained by dividing (i) the quotient of (A) the difference between the total revenue from the sale of Turf’s products during the Fourth Earnout Period minus the revenue from the sale of Turf’s products during the Third Earn-out Period divided by (B) 4, by (ii) the average trading price of the Company’s common stock over the fifteen day period immediately preceding the last day of the Fourth Earnout Period (the “Fourth Year Earnout Shares”).
Management estimated the fair value of the earn-out provision at $350,000 on the date of acquisition, and this amount is an accrued contingency at December 31, 2010. During the year ended December 31, 2011, the Company determined that the uncertainty surrounding the revenue stream of those assets acquired in the Turf acquisition was sufficient to trigger an impairment analysis. The Company has concluded that impairment had existed at December 31, 2011 and has recorded an impairment charge, measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value, of $518,600 for the year ended December 31, 2011 in addition the Company determined that the contingency at December 31, 2011 was $20,000.
The Company accrued a liability in the amount of $115,000 at December 31, 2010 as a result of threatened litigation from a third party. On June 2, 2010, the Company reached a settlement agreement with the third party and paid $45,000 in cash and 1,000,000 shares of the Company’s common stock at a closing price of $0.13. The stock was valued at $130,000, and the Company recorded a loss on legal settlement of $60,000 during the year ended December 31, 2010.
Legal proceedings
On January 24, 2011, the Securities and Exchange Commission filed a complaint in which the Company, along with Christopher Metcalf and Bozidar Vukovich, was named. The complaint alleges that the defendants in the complaint violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule 10b-5, 17. C.F.R §§ 240.10b-5. The only relief sought against the Company is a judgment enjoining the Company from violating those sections of the Securities Act, Exchange Act and Rule 10b-5 in the future. On October 18, 2011, the Company entered into a consent with the Securities and Exchange Commission which resolves any claims asserted in the complaint.
Turf Chemistry
On June 11, 2011, a former employee and shareholder of Turf Chemistry, Inc. filed a suit against the Company in the United State District court for Southern district of Texas McAllen Division. The Suit is based on a number of allegations being made by Mr. Alfredo Ledesma personally and on behalf of his company, Turf Chemistry, Inc. (“Turf”) The primary allegation against ESP is that the Company has failed to pay the purchase price of Turf to Mr. Ledesma. A review of the Company’s financial records indicated that in fact funds were moved from the Company to the account held by Turf. Whether or not the funds ultimately made their way to Mr. Ledesma is not within the control of the Company. Mr. Ledesma also alleges that as a condition of the acquisition of Turf, the Company agreed to continue to rent certain properties and to employ Mr. Ledesma. Neither claim is supported by the purchase agreement. At this time, we have no reason to believe that any ancillary documents exist creating these obligations. Furthermore, Mr. Ledesma alleges that Mr. Primeaux owes an accounting of sales by him and a percentage of the same. This particular allegation does not include the Company directly. The current discovery does not appear to support this claim.
The Company believes the suit is without merit and will defend the suit.
Platinum Chemicals LLC
On March 2, 2012 the Company filed a trade secret infringement lawsuit to protect its rights against a former employee, a competitor and officers of the competitor. On November 21, 2012, an Agreed Final Judgment was entered in the lawsuit ESP Petrochemicals, Inc. (“ESP Petro”), vs. Shane Cottrell, Platinum Chemicals, LLC, Ladd Naquin, Joe Lauer, Patrick Williams, Ralph McClelland and Ronald Walling (the “Defendants”) against the Defendants. Under the terms of the Agreed Final Judgment, the Defendants cannot offer or sell any chemical product or related services to a number of entities or in conjunction with any operations within designated Texas Railroad Commission districts for specified periods of time as long as ESP Petro is in conformance with the terms of the Agreed Final Judgment. The name of the entities, the lists of designated districts and the specific time periods are delineated in the Agreed Final Judgment. Additionally, the Defendants are not to solicit or recruit any ESP Petro employees, they must turn over any “ESP Information” (as that term is described in the Agreed Final Judgment) and they cannot directly or indirectly, offer, market, advertise, promote or otherwise describe in any way a product to a customer, prospective customer or third party, as being derived from ESP Petro’s formula or an equivalent ESP Petro product.
Other
On November 27, 2012 the Company issued a lock up agreement with three individual to acquire certain intellectual property in exchange for the issuance of 5,000,000 shares of the Company common stock and note payable totalling $1,950,000. As of the date of filing the final exchange agreement has not been executed by all the parties and the intellectual property has not been transferred to the Company nor have any shares been issued. For the period ended December 31, 2012 the Company has recorded as $352,000 for compensation and operating expense of the intended new business.
Note 13 - Related Party Transactions
As of December 31, 2012 and December 31, 2011, the Company had balances due to related parties as follows:
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 December 31, 2012 $159,727 was recorded as stock based compensation.
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 November 23, 2012 the Company granted a total of 13,000,000 options to members of the Board of Directors, the options have a term of 10 years, an exercise price of $0.09 per share and vest at 20% every six months and 1,000,000 options to a member of the Board of Directors, the option has an exercise price of $0.09 per share and vest immediately and used the Black-Scholes method to determine fair value. For the period from grant to December 31, 2012 $320,078 was recorded as stock based compensation.
On November 23, 2012 the Company granted 5,000,000 shares of restricted stock to the Company’s Chief Executive Officer, the shares were value at $400,000 and was recorded as stock based compensation for the period.
On October 1, 2011, the Company entered into a three year employment agreement with David Dugas to serve as President of the Company. Mr. Dugas will receive cash compensation of $16,667 per month and normal employee benefits. In addition, he received a one-time grant of 2,000,000 shares of common stock with a value of $230,000.
On October 1, 2011, the Company entered into a three year employment agreement with Tony Primeaux to serve as President of ESP Petrochemicals. Mr. Primeaux will receive cash compensation of $15,000 per month and normal employee benefits. In addition, he received a one-time grant of 2,000,000 option shares of common stock with a exercise price of $0.12 per share, which vest immediately, the value of the options are $220,880
On June 1, 2011, through the Board of Directors, the Company granted non-statutory options to purchase 5,000,000 shares each to two directors (one of whom is also the CEO of the Company). These options were granted with an exercise price equal to $0.14 per share. The stock price on the grant date was $0.125 per share. These options vest 20% on the commencement date, 20% on December 1, 2011 and 20% on the remaining 2 years anniversary of the vesting commencement date.
Note 14 - Guarantee liability
On November 3, 2008, ESP provided a guarantee to a director of Aurora and Boreal who loaned $120,000 to Aurora and Boreal. ESP provided this guarantee to encourage the director’s continued employment and commitment to the development of the concessions held by Aurora and Boreal, which the Company believed was vital to the future success of Aurora and Boreal. In the event that Aurora and Boreal did not repay the loan by the due date of June 1, 2009, ESP guaranteed to make the payment in the form of a convertible note due June 1, 2011. The convertible note is non interest bearing and is convertible into common stock of ESP at $1.20 per share. In exchange for issuing the convertible note to the director, ESP will receive the right to receive payments under the director’s note receivable from Aurora and Boreal.
ESP recorded the fair value of the guarantee liability at $48,000, which represented the fair value of the note receivable from Aurora and Boreal which ESP would take over from the director. On June 1, 2009 when Aurora and Boreal did not make the required payments on their notes payable to the director, ESP determined that the value of the guarantee liability should be increased to the full face amount of the guaranteed note of $120,000, resulting in a loss on guarantee liability of $72,000 during the year ended December 31, 2010 There has been no changes in the matter during 2011 and 2012 hence the balance remains same.
Note 15 - Subsequent event
On January 4, 2013, the Board of Directors appointed Robert Geiges, as Chief Financial Officer of ESP Resources, Inc. Mr. Geiges employment agreement commences on January 21, 2013 and will last for One (1) year with an option to renew. During the first year of his contract Mr. Geiges an annual salary of One Hundred Five Thousand Dollars ($105,000.00) and 500,000 shares of restricted common stock an additional 500,000 shares of restricted common stock for each year the employment agreement is renewed for up to Three (3) additional One (1) year terms. If the Company does not renew his employment agreement, Mr. Geiges will receive 500,000 shares of restricted common stock upon the fulfillment of the employment term. Effective January 21, 2013, David Dugas resigned from his position as Chief Financial Officer of the Company.
On January 23, 2013, the Company issued 250,000 shares of its common stock to a vendor for settlement of accrued expenses related to services rendered.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company did not have any changes in or disagreements with its accountants during the previous two fiscal years ended December 31, 2012 and December 31, 2011.
ITEM 9A
ITEM 9A - 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 annual report, being December 31, 2012, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company’s management, including our company’s President and Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company’s Chief Executive Officer and Chief Financial Officer concluded that our company’s disclosure controls and procedures are effective as at 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.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management’s report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Management has assessed the effectiveness of our internal control over financial reporting as at December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures are made in accordance with authorizations of management and our directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. As a result of this assessment, management concluded that, as at December 31, 2012, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. However, because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
This annual report does not include an attestation report of our independent auditors regarding internal control over financial reporting. Management's report was not subject to attestation by our independent auditors pursuant to temporary rules of the SEC that permit our company to provide only management's report in this annual report.
ITEM 9B
ITEM 9B - OTHER INFORMATION
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers, Promoters and Control Persons
All directors of our company hold office until the next annual meeting of our shareholders and until such director’s successor is elected and has been qualified, or until such director’s earlier death, resignation or removal. The following table sets forth the names, positions and ages of our executive officers and directors. Our board of directors elects officers and their terms of office are at the discretion of our board of directors.
Business Experience
The following is a brief account of the education and business experience during at least the past five years of our directors and executive officers, indicating their principal occupations during that period, and the name and principal business of the organizations in which such occupation and employment were carried out.
David Dugas- President and Director
Mr. Dugas has 35 years of professional engineering and management experience. Early in his career, Mr. Dugas gained petroleum engineering and senior management experience in the oil and gas industry holding positions of increasing responsibility in the areas of production, drilling and reservoir exploitation along with property and acquisition evaluations, operations management and completion design with Chevron and Texas Pacific Oil and Gas. Mr. Dugas continued his management and engineering development as an owner and operator of several service companies supplying equipment, goods and consulting services to the oil and gas industry in North and South America, West Africa, and the Far East. Mr. Dugas was a founding member and co-owner of the company that became Ocean Energy, a NYSE listed company with a multi-billion dollar market capitalization. Mr. Dugas was the Executive Vice-President of the company with responsibility for the property acquisition, management, production and reservoir engineering functions of the company. In November, 2006, Mr. Dugas founded ESP Resources, Inc. to provide petrochemicals and related services to the Oil and Gas industry in the Gulf of Mexico, Louisiana, Texas, Mississippi, and Oklahoma regions through a wholly-owned subsidiary, ESP Petrochemicals, Inc.
Mr. Dugas received his B.S. degree in Petroleum Engineering from the University of Louisiana at Lafayette graduating with highest honors. He is a member of the Society of Petroleum Engineers, a lifetime member of Phi Beta Kappa, a member of Tau Beta Pi National Engineering Society and is a licensed professional petroleum engineer in the state of Louisiana.
Tony Primeaux-Director
Mr. Primeaux has 37 years of professional experience in the value-added specialty chemical market. Mr. Primeaux began his career as a service and sales technician for Oilfield Chemicals, Inc., a large petrochemical supplier to Oil and Gas companies along the Gulf Coast and was subsequently promoted to Operations Manager of the company. Mr. Primeaux became an owner/operator of Chemical Control, Inc., a specialty chemical company, in the 1980’s that was sold to Coastal Chemicals, a larger competitor, after 11 years of successful operations. Mr. Primeaux has expertise in advanced interpretation and application petrochemical technologies having designed chemical programs to achieve maximum effectiveness in some of the most hostile environments in the operating world of production operations for the Oil and Gas industry.
Mr. Primeaux founded ESP Petrochemicals, Inc. in March, 2007 and currently serves as President of the organization. ESP Petrochemicals became a wholly owned subsidiary of ESP Resources in June, 2007. Mr. Primeaux received a degree in Business Management from the University of Louisiana at Lafayette and has furthered his education attending numerous industry sponsored courses in quality control and implementation, strategic planning and marketing, and drilling, production and work-over chemistry programs.
William M. Cox-Director
Mr. Cox is an executive with extensive experience in the Oil and Gas industry having served in various capacities as a geologist and asset manager for 30 years. Mr. Cox currently serves as the Exploration Manager for Stone Energy Corporation, a NYSE listed Oil and Gas Company. His experience as an interpretation and exploration geologist has contributed significantly to the discovery of substantial Oil and Gas reserves in the offshore and deepwater Gulf of Mexico including development of opportunities in the East Breaks, Green Canyon, and Garden Banks regions of the Gulf of Mexico where water depths often exceed 5000 feet.
Mr. Cox received his Bachelor of Science degree in Geology from the University of Louisiana at Lafayette and is a Certified Petroleum Geologist and a Texas Board Certified Licensed Professional Geologist.
Family Relationships
There are no family relationships among our directors or executive officers.
Involvement in Certain Legal Proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:
1.
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2.
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3.
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
4.
being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended December 31, 2012, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with.
Code of Ethics
Effective August 17, 2007, our company’s board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our company’s president (being our principal executive officer, principal financial officer and principal accounting officer), as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
1.
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2.
full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
3.
compliance with applicable governmental laws, rules and regulations;
4.
the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
5.
accountability for adherence to the Code of Business Conduct and Ethics.
Our Code of Business Conduct and Ethics requires, among other things, that all of our company’s personnel shall be accorded full access to our president with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our company’s personnel are to be accorded full access to our company’s board of directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our president.
In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company’s president. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the president, the incident must be reported to any member of our board of directors. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company’s Code of Business Conduct and Ethics.
Our Code of Business Conduct and Ethics was filed as an exhibit with our annual report on Form 10-KSB filed with the Securities and Exchange Commission on August 28, 2007. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to: ESP Resources Inc., of 111 Lions Club Rd., Scott, LA 70503.
Nomination Process
As of December 31, 2012, we did not effect any material changes to the procedures by which our shareholders may recommend nominees to our board of directors. Our board of directors does not have a policy with regards to the consideration of any director candidates recommended by our shareholders. Our board of directors has determined that it is in the best position to evaluate our company’s requirements as well as the qualifications of each candidate when the board considers a nominee for a position on our board of directors. If shareholders wish to recommend candidates directly to our board, they may do so by sending communications to the president of our company at the address on the cover of this annual report.
Committees of the Board
All proceedings of our board of directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the corporate laws of the State of Nevada and the bylaws of our company, as valid and effective as if they had been passed at a meeting of the directors duly called and held.
Our company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does our company have a written nominating, compensation or audit committee charter. Our board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by our board of directors.
Our company does not have any defined policy or procedure requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the early stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors assesses all candidates, whether submitted by management or shareholders, and makes recommendations for election or appointment.
A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our president, at the address appearing on the first page of this annual report.
Audit Committee Financial Expert
Our board of directors has determined that we do not have a board member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-B.
We believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The board of directors of our company does not believe that it is necessary to have an audit committee because our company believes that the functions of an audit committee can be adequately performed by our board of directors. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Executive Compensation
The particulars of compensation paid to the following persons:
(a)
our principal executive officer;
(b)
each of our two most highly compensated executive officers who were serving as executive officers at the end of the year ended December 31, 2012; and
(c)
up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the year ended December 31, 2012,
who we will collectively refer to as the named executive officers of our company for the years ended December 31, 2012 and 2011, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than our principal executive officer, whose total compensation does not exceed $100,000 for the respective fiscal year:
SUMMARY COMPENSATION TABLE
Equity Compensation Plan Information and Stock Options
We do not currently have any equity compensation plans or any outstanding stock options.
Compensation of Directors
We currently have no formal plan for compensating our directors for their services in their capacity as directors, although we may elect to issue stock options to such persons from time to time. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director. On July 10, 2012 and November 23, 2012 the board of directors approved the payment of 250,000 and 1,000,000, respectively, shares of the Company’s common stock to William Cox in remuneration for his services as an independent member of the Company’s board of directors.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the board of directors or a committee thereof.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table shows ownership of our common stock on December 31, 2012, based on One Hundred Fifty-One Million Seven Hundred Eighty-Five Thousand Two Hundred Forty-Nine (151,785,249) shares of common stock outstanding which includes 955,000 shares of common stock that were in the processof being cancelled on that date, (i) by each Director and Named Executive Officer; (ii) all of our Directors and Named Executive Officers as a group and (iii) each person or entity known to us to own beneficially more than Five Percent (5%) of our capital stock. Except to the extent indicated in the footnotes to the following table, the person or entity listed has sole voting and dispositive power with respect to the shares that are deemed beneficially owned by such person or entity, subject to community property laws, where applicable:
* Less than 1% (0.99%)
(1)
The address for purposes of this table is the Company’s address: 9595 Six Pines Drive, Suite 6305, The Woodlands, Texas 77380.
(2)
This number includes shares the Officer or Director is deemed to be the “beneficial owner” of under Rule 16a-1 of the Securities Exchange Act of 1934, which includes the shares owned by a spouse and/or child(ren) living in the same household.
(3)
Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of the common stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date indicated above upon the exercise of options, warrants or convertible securities. Each beneficial owner’s percentage ownership is determined by assuming that options, warrants or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days of the date indicated above, have been exercised.
(4) Based the number of shares of our common stock outstanding on or around the filing date, shares of common stock subject to options, which are currently exercisable and able to be included for the purposes of computing the percentage of ownership of such person but are not treated as outstanding for the purposes of computing the percentage of any other person.
(5) The share ownership includes 300,000 shares that were subsequently cancelled.
Change in Control
We are not aware of any arrangement that might result in a change in control of our company in the future.
Equity Plan Compensation Information
Our company does not currently have a stock option plan or other form of equity plan.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as described below, no director, executive officer, principal shareholder holding at least 5% of our common shares, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transaction, during the year ended December 31, 2012, in which the amount involved in the transaction exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at the year end for the last three completed fiscal years.
As of December 31, 2012 and December 31, 2011, the Company had balances due to related parties as follows;
Year Ended December 31, 2012
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 December 31, 2012 $159,727 was recorded as stock based compensation.
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 November 23, 2012 the Company granted a total of 13,000,000 options to members of the Board of Directors, the options have a term of 10 years, an exercise price of $0.09 per share and vest at 20% every six months and 1,000,000 options to a member of the Board of Directors, the option has an exercise price of $0.09 per share and vest immediately and used the Black-Scholes method to determine fair value. For the period from grant to December 31, 2012 $320,078 was recorded as stock based compensation.
On November 23, 2012 the Company granted 5,000,000 shares of restricted stock to the Company’s Chief Executive Officer, the shares were value at $400,000 and was recorded as stock based compensation for the period.
Year Ended December 31, 2011
On June 1, 2011, through the Board of Directors, the Company granted non-statutory options to purchase 5,000,000 shares each to two directors (one of whom is also the CEO of the Company). These options were granted with an exercise price equal to $0.14 per share. The stock price on the grant date was $0.125 per share. These options vest 20% on the commencement date, 20% on December 1, 2011 and 20% on the remaining 2 years anniversary of the vesting commencement date.
On October 1, 2011, the Company entered into a three year employment agreement with David Dugas to serve as President of the Company. Mr. Dugas will receive cash compensation of $16,667 per month and normal employee benefits. In addition, he received a one-time grant of 2,000,000 shares of common stock.
On October 1, 2011, the Company entered into a three year employment agreement with Tony Primeaux to serve as President of ESP Petrochemicals. Mr. Primeaux will receive cash compensation of $15,000 per month and normal employee benefits. In addition, he received a one-time grant of 2,000,000 option shares of common stock with a exercise price of $0.12 per share, which vest immediately.
Corporate Governance
We currently act with three directors consisting of David Dugas, Tony Primeaux and William M. Cox. William M. Cox is considered an “independent director” as defined by Rule 5605(a)(2) of The NASDAQ Listing Rules.
We do not have a standing audit, compensation or nominating committee, but our entire board of directors acts in such capacities. We believe that the members of our board of directors are capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The board of directors of our company does not believe that it is necessary to have a standing audit, compensation or nominating committee because we believe that the functions of such committees can be adequately performed by the board of directors. In addition, we believe that retaining one or more additional directors who would qualify as independent as defined in Rule 4200(a)(15) of the Rules of NASDAQ Marketplace Rules would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact the we have not generated any revenues from operations to date.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The aggregate fees billed or to be billed by MaloneBailey, LLP for professional services rendered for the audit of our annual financial statements included in our Form 10-K during the fiscal years ended December 31, 2012 and 2011 are as follows:
Audit Fees
This category includes fees associated with our annual audit and the reviews of our quarterly reports on Form 10-Q. This category also includes fees associated with advice on audit and accounting matters that arose during, or as a result of, the audit or the review of our interim financial statements, statutory audits, the assistance with the review of our SEC registration statements and the audit of our internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002.
Audit-Related Fees
This category includes fees associated with the audit of our whole-owned subsidiary ESP Petrochemical and
Tax Fees
This category includes fees for tax planning for merger and acquisition activities, tax consultations, the review of income tax returns and assistance with state tax examinations. We did not engage MaloneBailey, LLP to provide any tax services for the years ended December 31, 2012 and 2011.
All Other Fees
We did engage MaloneBailey, LLP to provide due diligence service for review of potential acquisition target for the year ended December 31, 2012. We did not engage MaloneBailey, LLP to provide any other services for the years ended December 31, 2011.
Our board of directors, who acts as our audit committee, has adopted a policy governing the pre-approval by the board of directors of all services, audit and non-audit, to be provided to our company by our independent auditors. Under the policy, the board or directors has pre-approved the provision by our independent auditors of specific audit, audit related, tax and other non-audit services as being consistent with auditor independence. Requests or applications to provide services that require the specific pre-approval of the board of directors must be submitted the board of directors by the independent auditors, and the independent auditors must advise the board of directors as to whether, in the independent auditor’s view, the request or application is consistent with the Securities and Exchange Commission’s rules on auditor independence.
The board of directors has considered the nature and amount of the fees billed by Malone & Bailey, and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining the independence of the firm.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K.
(a)
During the quarter ending December 31, 2008, the Company filed the following Exhibits and Form 8Ks:
October 17, 2008, filed an 8K for: Item 1.02, Termination of a Material Definitive Agreement November 5, 2008,filed an 8K for: Item 1.01 Entry into a Material Definitive Agreement, Item 2.01 Completion of Acquisition of Disposition of Assets, Item 9.01Agreement December 15, 2008, filed an 8K for: Item 8.01 Other Events, Item 9.01 Letter of Intent December 29, 2009, filed an 8K for: Item 4.01 Changes in Registrant’s Certifying Accountant, Item 9.01 Letter January 6, 2009, filed an 8K for: Item 1.01 Entry into a Material Definitive Agreement, Item 2.01 Completion of Acquisition of Disposition of Assets, Item 5.01 Changes in Control of the Registrant, Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Officers, Item 9.01 Stock Purchase Agreements
(b)
Exhibits
_______
*Filed herewith
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.
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.
Date: March 29, 2013
By:
/s/ David Dugas
David Dugas
President and Director
Date: March 29, 2013
By:
/s/ Tony Primeaux
Tony Primeaux
Director
Date: March 29, 2013
By:
/s/ William M Cox
William M. Cox
Director