UNITED
STATES  SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




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


For the
quarterly period ended June 30, 2009




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


For the
transition period from _______ to ________.Commission File Number
0-31357




EPIC ENERGY RESOURCES,
INC.


(Exact
name of registrant as specified in its charter)





Colorado
                          
                          94-3363969(State
      or other jurisdiction
                          
                          (I.R.S.  Employer
      Identification No.)of
      incorporation)1450
      Lake Robbins Drive, Suite 160The
      Woodlands, TX 77380Address
      of principal executive
offices





(281)
419-3742


(Registrant's
telephone number, including area code)




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




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




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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): YES  ̈ NO x




As of
July 31, 2009, the Company had 44,105,781 issued and outstanding shares of
common stock.







EPIC ENERGY RESOURCES
INC.




Table
of Contents




PagePART
      I — FINANCIAL INFORMATIONItem 1.
      Financial StatementsConsolidated
      Balance Sheets as of  June 30, 2009 and December 31, 2008
      (unaudited)
                    2Consolidated
      Statements of Operations for the three and six months ended June 30, 2009
      and 2008 (unaudited)
                    3Consolidated
      Statements of Stockholders’ Equity (Deficit) for the six months ended June
      30, 2009 (unaudited)
                    4Consolidated
      Statements of Cash Flows for the six months ended June 30, 2009 and 2008
      (unaudited)
                    5Notes
      to Unaudited Consolidated Financial Statements
                    6Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                    14Item 4T.
      Controls and Procedures
                    17PART
      II — OTHER INFORMATIONItem
      1. Legal Proceedings
                    18Item 6.
      Exhibits
                    18Signatures
                    20Certification
      Pursuant to Section 302Certification
      Pursuant to Section 302Certification
      Pursuant to Section 906


1


PART
1. FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





EPIC
ENERGY RESOURCES INC


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)


(unaudited)




June
      30,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008ASSETSCurrent
      AssetsCash and cash
      equivalents
                                      
                                      $
                                      3,291
                                      
                                      
                                      $
                                      4,785Accounts
    receivable:Billed, net of allowance of
      $6,408  and $6,570, respectively
                                      
                                      
                                      6,710
                                      
                                      
                                      
                                      10,690Unbilled
                                      
                                      
                                      1,198
                                      
                                      
                                      
                                      388Prepaid expenses and other
      current assets
                                      
                                      
                                      592
                                      
                                      
                                      
                                      2,027Total current
    assets
                                      
                                      
                                      11,791
                                      
                                      
                                      
                                      17,890Property
      and equipment, net
                                      
                                      
                                      4,190
                                      
                                      
                                      
                                      5,136Assets
      held for sale:Proved
      oil and gas properties, (full cost method), net of
accumulated
                                        depletion and impairments of $0
      and $9,257, respectively
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,332Other
      mineral reserves
                                      
                                      
                                      -
                                      
                                      
                                      
                                      783Other
      asset held for sale
                                      
                                      
                                      3,395
                                      
                                      
                                      
                                      3,875Other
      assets
                                      
                                      
                                      43
                                      
                                      
                                      
                                      45Debt
      issuance costs, net of accumulated amortization of $700 and$481,
      respectively
                                      
                                      
                                      1,329
                                      
                                      
                                      
                                      1,548Goodwill
                                      
                                      
                                      18,837
                                      
                                      
                                      
                                      18,837Other
      intangible assets, net
                                      
                                      
                                      11,612
                                      
                                      
                                      
                                      12,666Total
      assets
                                      
                                      $
                                      51,197
                                      
                                      
                                      $
                                      62,112LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts payable
                                      
                                      $
                                      736
                                      
                                      
                                      $
                                      5,404Accrued
    liabilities
                                      
                                      
                                      3,016
                                      
                                      
                                      
                                      3,762Deferred revenue
                                      
                                      
                                      9,090
                                      
                                      
                                      
                                      2,684Customer
deposits
                                      
                                      
                                      1,339
                                      
                                      
                                      
                                      4,505Current liabilities associated
      with assets held for sale
                                      
                                      
                                      322
                                      
                                      
                                      
                                      4,383Current portion of long-term
      debt
                                      
                                      
                                      6,221
                                      
                                      
                                      
                                      7,504Total current
      liabilities
                                      
                                      
                                      20,724
                                      
                                      
                                      
                                      28,242Long-term
      liabilities associated with assets held for sale
                                      
                                      
                                      3,785
                                      
                                      
                                      
                                      3,949Long-term
      debt
                                      
                                      
                                      5,398
                                      
                                      
                                      
                                      6,372Derivative
      liability
                                      
                                      
                                      3,413
                                      
                                      
                                      
                                      -Deferred
      tax liability
                                      
                                      
                                      1,775
                                      
                                      
                                      
                                      1,775Total
      liabilities
                                      
                                      
                                      35,095
                                      
                                      
                                      
                                      40,338STOCKHOLDERS'
      EQUITYCommon
      stock, no par value: 100,000,000 authorized; 44,105,781 and 43,495,160
      shares issued and outstanding, respectively
                                      
                                      
                                      33,639
                                      
                                      
                                      
                                      41,783Additional paid-in
      capital
                                      
                                      
                                      1,644
                                      
                                      
                                      
                                      15,014Accumulated
    deficit
                                      
                                      
                                      (19,181
                                      )
                                      
                                      
                                      (35,023
                                      )Total
      stockholders’ equity
                                      
                                      
                                      16,102
                                      
                                      
                                      
                                      21,774Total
      liabilities and stockholders’ equity
                                      
                                      $
                                      51,197
                                      
                                      
                                      $
                                      62,112




See
accompanying notes to the unaudited consolidated financial
statements


2


EPIC
ENERGY RESOURCES INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except share and per share data)


(unaudited)





Three
      months ended June 30,
                                                    
                                                    
                                                    Six
      months ended June 30,2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2008REVENUESConsulting fees
                                                    
                                                    $
                                                    7,028
                                                    
                                                    
                                                    $
                                                    8,934
                                                    
                                                    
                                                    $
                                                    14,802
                                                    
                                                    
                                                    $
                                                    17,016Reimbursed
    expenses
                                                    
                                                    
                                                    3,461
                                                    
                                                    
                                                    
                                                    7,667
                                                    
                                                    
                                                    
                                                    4,701
                                                    
                                                    
                                                    
                                                    17,059Total revenues
                                                    
                                                    
                                                    10,489
                                                    
                                                    
                                                    
                                                    16,601
                                                    
                                                    
                                                    
                                                    19,503
                                                    
                                                    
                                                    
                                                    34,075OPERATING
      EXPENSESReimbursed
    expenses
                                                    
                                                    
                                                    1,844
                                                    
                                                    
                                                    
                                                    5,727
                                                    
                                                    
                                                    
                                                    2,888
                                                    
                                                    
                                                    
                                                    11,701Compensation and
      benefits
                                                    
                                                    
                                                    4,762
                                                    
                                                    
                                                    
                                                    7,307
                                                    
                                                    
                                                    
                                                    10,010
                                                    
                                                    
                                                    
                                                    13,397General and
      administrative
                                                    
                                                    
                                                    1,105
                                                    
                                                    
                                                    
                                                    3,045
                                                    
                                                    
                                                    
                                                    1,947
                                                    
                                                    
                                                    
                                                    5,265Professional and subcontracted
      services
                                                    
                                                    
                                                    958
                                                    
                                                    
                                                    
                                                    1,759
                                                    
                                                    
                                                    
                                                    2,179
                                                    
                                                    
                                                    
                                                    3,981Occupancy, communication and
      other
                                                    
                                                    
                                                    309
                                                    
                                                    
                                                    
                                                    439
                                                    
                                                    
                                                    
                                                    621
                                                    
                                                    
                                                    
                                                    838Depreciation and
      amortization
                                                    
                                                    
                                                    739
                                                    
                                                    
                                                    
                                                    477
                                                    
                                                    
                                                    
                                                    1,861
                                                    
                                                    
                                                    
                                                    934Impairment
    charges
                                                    
                                                    
                                                    480
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    480
                                                    
                                                    
                                                    
                                                    -Total operating
      expenses
                                                    
                                                    
                                                    10,197
                                                    
                                                    
                                                    
                                                    18,754
                                                    
                                                    
                                                    
                                                    19,986
                                                    
                                                    
                                                    
                                                    36,116Income
      (loss) from operations
                                                    
                                                    
                                                    292
                                                    
                                                    
                                                    
                                                    (2,153
                                                    )
                                                    
                                                    
                                                    (483
                                                    )
                                                    
                                                    
                                                    (2,041
                                                    )OTHER
      INCOME (EXPENSE)Derivative loss
                                                    
                                                    
                                                    (2,421
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2,626
                                                    )
                                                    
                                                    
                                                    -Interest expense
                                                    
                                                    
                                                    (1,790
                                                    )
                                                    
                                                    
                                                    (1,685
                                                    )
                                                    
                                                    
                                                    (3,873
                                                    )
                                                    
                                                    
                                                    (3,085
                                                    )Interest and other income
      (expense)
                                                    
                                                    
                                                    (10
                                                    )
                                                    
                                                    
                                                    29
                                                    
                                                    
                                                    
                                                    85
                                                    
                                                    
                                                    
                                                    57Total other expense,
      net
                                                    
                                                    
                                                    (4,221
                                                    )
                                                    
                                                    
                                                    (1,656
                                                    )
                                                    
                                                    
                                                    (6,414
                                                    )
                                                    
                                                    
                                                    (3,028
                                                    )Loss
      from continuing operations
                                                    
                                                    
                                                    (3,929
                                                    )
                                                    
                                                    
                                                    (3,809
                                                    )
                                                    
                                                    
                                                    (6,897
                                                    )
                                                    
                                                    
                                                    (5,069
                                                    )DISCOUNTINUED
      OPERATIONSLoss from operations of oil and
      gas segment
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2
                                                    )
                                                    
                                                    
                                                    (162
                                                    )
                                                    
                                                    
                                                    (4
                                                    )Gain on sale of oil and gas
      properties
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2,110
                                                    
                                                    
                                                    
                                                    -Income (loss) from discontinued
      operations
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2
                                                    )
                                                    
                                                    
                                                    1,948
                                                    
                                                    
                                                    
                                                    (4
                                                    )Net loss
                                                    
                                                    $
                                                    (3,929
                                                    )
                                                    
                                                    $
                                                    (3,811
                                                    )
                                                    
                                                    $
                                                    (4,949
                                                    )
                                                    
                                                    $
                                                    (5,073
                                                    )LOSS
      PER COMMON SHARE -
                                                      Basic and
Diluted
                                                    
                                                    $
                                                    (.09
                                                    )
                                                    
                                                    $
                                                    (.09
                                                    )
                                                    
                                                    $
                                                    (.11
                                                    )
                                                    
                                                    $
                                                    (.12
                                                    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING - Basic and Diluted
                                                    
                                                    
                                                    44,105,732
                                                    
                                                    
                                                    
                                                    42,968,887
                                                    
                                                    
                                                    
                                                    44,041,540
                                                    
                                                    
                                                    
                                                    42,968,887




See
accompanying notes to the unaudited consolidated financial
statements


3


EPIC
ENERGY RESOURCES INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


(In
thousands, except share data)


(unaudited)





Common
      Stock
                                
                                
                                Additional
                                  Paid-In
                                
                                
                                AccumulatedShares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Deficit
                                
                                
                                TotalBALANCE,
      January 1, 2009
                                
                                
                                43,495,160
                                
                                
                                $
                                41,783
                                
                                
                                $
                                15,014
                                
                                
                                $
                                (35,023
                                )
                                
                                $
                                21,774Cumulative
      effect of change in accounting principle
                                
                                
                                -
                                
                                
                                
                                (8,144
                                )
                                
                                
                                (13,395
                                )
                                
                                
                                20,791
                                
                                
                                
                                (748
                                )BALANCE,
      January 1, 2009, as adjusted
                                
                                
                                43,495,160
                                
                                
                                
                                33,639
                                
                                
                                
                                1,619
                                
                                
                                
                                (14,232
                                )
                                
                                
                                21,026Amortization
      of stock options and stock bonuses
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                25
                                
                                
                                
                                -
                                
                                
                                
                                25Issuance
      of vested shares
                                
                                
                                610,621
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                
                                
                                
                                
                                (4,949
                                )
                                
                                
                                (4,949
                                )BALANCE,
      June 30, 2009
                                
                                
                                44,105,781
                                
                                
                                $
                                33,639
                                
                                
                                $
                                1,644
                                
                                
                                $
                                (19,181
                                )
                                
                                $
                                16,102




See
accompanying notes to unaudited consolidated financial
statements


4


EPIC
ENERGY RESOURCES INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)


(unaudited)




Six
      Months Ended June 30,2009
                                  
                                  
                                  2008OPERATING
      ACTIVITIES:Net loss
                                  
                                  $
                                  (4,949
                                  )
                                  
                                  $
                                  (5,073
                                  )Adjustments to reconcile net
      loss to net cash provided by operatingactivities:Depreciation and
      amortization
                                  
                                  
                                  1,861
                                  
                                  
                                  
                                  934Allowance for doubtful
      accounts
                                  
                                  
                                  206
                                  
                                  
                                  
                                  462Amortization of debt discount
      and debt issuance costs
                                  
                                  
                                  2,762
                                  
                                  
                                  
                                  1,638Impairment of asset held for
      sale
                                  
                                  
                                  480
                                  
                                  
                                  
                                  -Stock-based compensation
      expense
                                  
                                  
                                  25
                                  
                                  
                                  
                                  873Loss on sale of property and
      equipment
                                  
                                  
                                  173
                                  
                                  
                                  
                                  -Lease operating
      expense
                                  
                                  
                                  98
                                  
                                  
                                  
                                  156Accretion
    expense
                                  
                                  
                                  2
                                  
                                  
                                  
                                  4Derivative loss
                                  
                                  
                                  2,626
                                  
                                  
                                  
                                  -Gain on sale of oil and gas
      properties
                                  
                                  
                                  (2,110
                                  )
                                  
                                  
                                  -Gain on early extinguishment of
      debt
                                  
                                  
                                  (94
                                  )
                                  
                                  
                                  -Changes in operating assets and
      liabilities:Accounts
    receivable
                                  
                                  
                                  2,964
                                  
                                  
                                  
                                  (6,295
                                  )Prepaid expenses and other
      current assets
                                  
                                  
                                  1,435
                                  
                                  
                                  
                                  23Other non-current
      assets
                                  
                                  
                                  2
                                  
                                  
                                  
                                  13Accounts
payable
                                  
                                  
                                  (4,668
                                  )
                                  
                                  
                                  6,271Accrued
    liabilities
                                  
                                  
                                  (692
                                  )
                                  
                                  
                                  971Customer
    deposits
                                  
                                  
                                  (3,166
                                  )
                                  
                                  
                                  -Deferred
revenue
                                  
                                  
                                  6,406
                                  
                                  
                                  
                                  1,047Net cash provided by operating
      activities
                                  
                                  
                                  3,361
                                  
                                  
                                  
                                  1,024INVESTING
      ACTIVITIES:Increase in restricted
      cash
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,310Purchases of property and
      equipment
                                  
                                  
                                  (139
                                  )
                                  
                                  
                                  (1,156
                                  )Proceeds from sale of property
      and equipment
                                  
                                  
                                  52
                                  
                                  
                                  
                                  -Acquisition of EIS, net of cash
      received
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (232
                                  )Net
      cash provided by (used in) investing activities
                                  
                                  
                                  (87
                                  )
                                  
                                  
                                  922FINANCING
      ACTIVITIES:Bank overdrafts
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,442
                                  )Payments on debt
                                  
                                  
                                  (4,768
                                  )
                                  
                                  
                                  (486
                                  )Cash
      used in financing activities
                                  
                                  
                                  (4,768
                                  )
                                  
                                  
                                  (3,928
                                  )Net
      decrease in cash and cash equivalents
                                  
                                  
                                  (1,494
                                  )
                                  
                                  
                                  (1,982
                                  )Cash
      and cash equivalents, beginning of period
                                  
                                  
                                  4,785
                                  
                                  
                                  
                                  3,483Cash
      and cash equivalents, end of period
                                  
                                  $
                                  3,291
                                  
                                  
                                  $
                                  1,501SUPPLEMENTAL
      CASH FLOW DISCLOSURES:Cash
      paid for interest
                                  
                                  $
                                  1,768
                                  
                                  
                                  $
                                  3,085NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Settlement
      of notes payable and accrued interest through sale of oil and gas
      properties
                                  
                                  $
                                  3,993
                                  
                                  
                                  $
                                  -Cumulative
      net effect of change in accounting principle
                                  
                                  $
                                  748
                                  
                                  
                                  $
                                  -Settlement
      of notes payable through sale of property and equipment
                                  
                                  $
                                  51
                                  
                                  
                                  $
                                  -Stock
      issued  for EIS acquisition
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,050Notes
      payable used to acquire property and equipment
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  346





See
accompanying notes to the unaudited consolidated financial
statements


5


EPIC
ENERGY RESOURCES INC


Notes
to Unaudited Consolidated Financial Statements




1.
Organization, Operations and Basis of Presentation




Epic
Energy Resources, Inc (“Epic”) was incorporated in Colorado in 1989. Epic was
relatively inactive until April 2006, when current management gained control and
became focused on energy related activities including consulting, engineering,
and oil and gas production activities. Epic consists of its wholly owned
subsidiaries; The Carnrite Group, LLC (“Carnrite”), Pearl Investment Company and
its wholly owned subsidiaries (“Pearl”), Epic Integrated Solutions, LLC (“EIS”)
and Epic Exploration & Production, LLC (“EE&P”). Epic and its
subsidiaries (the “Company”) are engaged primarily in providing engineering,
consulting, construction management, operations, maintenance, and field and
project management services to the oil, gas and energy industry. Epic also
formed an operational joint venture with a private investor group, Argos Asset
Management, LLC (“Argos”), to support the private investor group’s investments
in infrastructure, processing and production related projects; and co-investment
in similar projects with Epic’s clients. It is expected that the investment and
co-investment projects will primarily be projects in which the Company provides
(on a fee-for-service basis) engineering, design, construction management and
operational services related to oil and gas production, pipeline, gathering and
compression systems, and including associated processing
facilities.




The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America, (“GAAP”), for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and disclosures required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 2009, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009. The balance sheet at December 31, 2008, has been derived from
the audited financial statements at that date but does not include all of the
information and disclosures required by GAAP for complete financial statements.
For further information, refer to the financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008.




2.
Summary of Accounting Policies




Principles
of consolidation




The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries.  Intercompany accounts and transactions
have been eliminated.




Use
of Estimates





The
preparation of financial statements in conformity with GAAP 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 periods. Actual results could differ from those estimates.
The Company’s significant estimates made in connection with the preparation of
the accompanying financial statements include the carrying value of oil and gas
properties, goodwill and intangible assets, revenue recognition on uncompleted
contracts, allowance for doubtful accounts, and the valuation of stock options
and warrants.




Reclassification




Certain
items from the December 31, 2008 and the three and six months ended June 30,
2008 consolidated financial statements have been reclassified to conform with
the three and six months ended June 30, 2009 financial statement presentation.
There is no effect on net income, cash flows or stockholders’ equity as a result
of these reclassifications.


6


Fair
Value of Financial Instruments




The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and long-term debt. The
estimated fair value of cash, accounts receivable, accounts payable and accrued
liabilities approximate their carrying amounts due to the short-term nature of
these instruments. The carrying value of long-term debt also approximates
fair value since their terms are similar to those in the lending market for
comparable loans with comparable risks. None of these instruments are held for
trading purposes.




The
Company reviews their warrants and conversion features of the securities
issued as to whether they are freestanding or contain an embedded derivative
and, if so, whether they are classified as a liability at each reporting period
until the amount is settled and reclassified into equity with changes in fair
value recognized in current earnings. At June 30, 2009, the Company has
22,685,031 warrants to purchase common stock, the fair values of which are
classified as a liability. Some of these warrants have embedded conversion
features in the debt that are treated as a discount on the notes. Such financial
instruments are initially recorded at fair value and amortized to interest
expense over the life of the debt.




The
Company utilizes various types of financing to fund their business needs,
including debt with warrants attached and other instruments indexed to their
stock. The embedded conversion features utilized in these instruments require an
initial measurement of the fair value of the derivative, if any.  The
Company amortizes the discount associated with these warrants to interest
expense at each reporting period.





Financial
Accounting Standards No. 157, Fair Value Measurements (“FAS
157”)establishes a
common definition for fair value to be applied with existing GAAP requiring use
of fair value, establishes a framework for measuring fair value, and expands
disclosure about such fair value measurements.





FAS 157
also establishes a fair value hierarchy which distinguishes between assumptions
based on market data (observable inputs) and an entity’s own assumptions
(unobservable inputs). The hierarchy consists of three levels:





·
            Level one —
      Quoted market prices in active markets for identical assets or
      liabilities;





·
            Level two —
      Inputs other than level one inputs that are either directly or indirectly
      observable; and





·
            Level three —
      Unobservable inputs developed using estimates and assumptions, which are
      developed by the reporting entity and reflect those assumptions that a
      market participant would use.





Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates their hierarchy disclosures
each quarter. The Company’s only asset or liability measured at fair value on a
recurring basis is their derivative liability associated with the warrants to
purchase common stock (discussed above). The Company classifies the fair value
of these warrants under level three. The fair value of the derivative liability
was calculated using the black-scholes method. Under the black-scholes method
using an expected life of four years, volatility of 131% and a risk-free
interest rate of 1.43%, the Company determined the fair value of the warrants to
be $787,340 at January 1, 2009. Under the black-scholes method using an expected
life of 3.5 years, volatility of 175% and a risk-free interest rate of 1.65%,
the Company determined the fair value of the warrants to be $3,413,084 at June
30, 2009.





The
following shows the changes in the level three liability measured on a recurring
basis for the six months ended June 30, 2009:





Beginning
      balance
                    
                    $
                    787,340Total
      derivative loss
                    
                    
                    2,625,744Ending
      balance
                    
                    $
                    3,413,084




Recent
Accounting Pronouncements




Recently Adopted Accounting
Pronouncements





In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161,Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133 (“FAS 161”). FAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. FAS 161 is effective for fiscal years beginning after
November 15, 2008. At June 30, 2009, the Company has a derivative liability
of $3,413,084 related to the warrants to purchase common stock
liability.  The derivatives instruments were not entered into as
hedging activities, and the change in value of the liability is included in the
accompanying Consolidated Statement of Operations.




7


In
June 2008, the FASB finalized EITF 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock(“EITF 07-5”).
EITF 07-5 provides guidance on determining whether an instrument (or an embedded
feature) is indexed to an entity’s own stock, which would qualify as a scope
exception under FASB No. 133, Accounting for Derivative
Instruments and Hedging Activities (“FAS 133”). EITF 07-5 is effective
for the Company’s fiscal year beginning after December 15, 2008. The Company
adopted of EITF 07-5 on January 1, 2009 and as such some of the Company’s
outstanding warrants that were previously classified in equity were reclassified
to liabilities as of January 1, 2009 as these warrants contain exercise price
reset features and were no longer deemed to be indexed to the Company’s own
stock. See Note 7 for further discussion.





In April
2009, the FASB issued FASB Staff Position FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,(“FSP FAS 157-4”) provides
guidelines for making fair value measurements more consistent with the
principles presented in FAS 157. FSP FAS 157-4 provides additional guidance
for estimating fair value measurements in accordance with FAS 157 when
there is not an active market or where the price inputs being used represent
distressed sales. FSP FAS 157-4 provides additional guidance on the major
categories for which equity and debt securities disclosures are to be presented
and amends the disclosure requirements of FAS 157 to require disclosure in
interim and annual periods of the inputs and valuation techniques used to
measure fair value and a discussion of changes in valuation techniques and
related inputs, if any, during the period. FSP FAS 157-4 shall be applied
prospectively and is effective for interim and annual reporting periods ending
after June 15, 2009. The adoption of this standard did not have a material
impact on the consolidated financial position, results of operations or cash
flows of the Company.




In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, (“FSP FAS 107-1” and “APB 28-1”) amends FASB
Statement No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about
fair value of financial instruments in interim as well as in annual financial
statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements. FSP FAS 107-1
and APB 28-1 are effective for periods ending after June 15, 2009. The Company
adopted FSP FAS 107-1 and APB 28-1 for the quarter ended June 30, 2009 and
included the required disclosures in the summary of accounting policies
above.





In May
2009, the FASB issued SFAS No. 165, Subsequent Event, (“FAS
165”). FAS 165 sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. FAS 165 is effective for interim or
annual periods ending after June 15, 2009 and applies prospectively. The
adoption of this standard did not have a material impact on the consolidated
financial position, results of operations or cash flows of the Company. The
Company evaluated all events and transactions that occurred after June 30, 2009
up through August 6, 2009, the date these financial statements were issued.
During this period, the Company did not have any material recognizable
subsequent events.





Recently Issued Accounting
Standards





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – A
Replacement of FASB Statement No. 162 (“FAS 168”). FAS 168 establishes
the FASB Accounting Standards
Codification(“Codification”) as the single source of authoritative U.S.
generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants. FAS 168 and the Codification are effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. When effective, the Codification will supersede all existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. Following FAS 168, the FASB will not issue new standards in
the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will
serve only to: (a)
update the Codification; (b) provide background
information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification. The adoption of FAS 168 will
not have an impact on the Company’s consolidated financial
statements.




8


3.
Property and Equipment





Property
and equipment consisted of the following (in thousands):





June 30,
                            2009
                          
                          
                          December 31,
                            2008Vehicles
                          
                          $
                          2,333
                          
                          
                          $
                          2,731Computer
      equipment
                          
                          
                          2,555
                          
                          
                          
                          2,521Office
      furniture and equipment
                          
                          
                          912
                          
                          
                          
                          825Leasehold
      improvements
                          
                          
                          559
                          
                          
                          
                          555Construction
      in progress
                          
                          
                          10
                          
                          
                          
                          -6,369
                          
                          
                          
                          6,632Less:
      Accumulated depreciation and amortization
                          
                          
                          (2,179
                          )
                          
                          
                          (1,496
                          )Total
      property and equipment, net
                          
                          $
                          4,190
                          
                          
                          $
                          5,136





Depreciation
expense for the three months and six months ended June 30, 2009 was $403,605 and
$808,410, respectively.





In 2008,
the Company adopted a plan to dispose of its airplane. The Company expects that
the final sale and disposal of the assets will be completed by the end of 2009.
The carrying value of the airplane that is held for sale is separately presented
as “Other assets held for sale” in the accompanying Consolidated Balance Sheets
and as such this asset is no longer depreciated. During the quarter ended June
30, 2009, the Company recognized an additional impairment on the airplane of
$479,591.




4.
Oil and Gas Properties





In
February 2009, the Company sold its Kansas property and dissolved its joint
venture associated to its Oklahoma property. The Kansas property was sold to a
third party who assumed the note payable, including accrued but unpaid interest
totaling $3,993,071 at the acquisition date and the future profits interest in
the properties of Statesman Resources, Inc. subject to the Company’s retention
of an overriding royalty interest covering the Kansas property. During the six
months ended June 30, 2009, the Company recorded a $2,110,066 gain on the sale
of the Kansas property, which is included in discontinued operations in the
accompanying Consolidated Statements of Operations.  The properties
and their related assets and liabilities have been shown separately as assets
held for sale and liabilities associated with assets held for sale on the
accompanying Consolidated Balance Sheets. Assets and liabilities of discontinued
operations consisted of the following at December 31, 2008 (in
thousands):





ASSETS:Assets
      held for sale:Proved
      oil & gas properties, net
                      
                      $
                      1,332Other
      mineral reserves
                      
                      
                      783Assets
      of discontinued operations
                      
                      $
                      2,115LIABILITIES:Current
      Liabilities:Accrued
      interest
                      
                      $
                      547Asset
      retirement obligation
                      
                      
                      230Note
      payable
                      
                      
                      3,295Total
      liabilities of discontinued operations
                      
                      $
                      4,072





5.  Goodwill
and Other Intangible Assets





The
Company’s intangible assets consist of the following at June 30, 2009 (in
thousands):





Carrying
                        amount
                      
                      
                      Accumulated
                        amortization
                      
                      
                      Net
      book
                        valueCustomer
      relationships
                      
                      $
                      6,961
                      
                      
                      $
                      (1,029
                      )
                      
                      $
                      5,932Backlog
                      
                      
                      5,124
                      
                      
                      
                      (5,124
                      )
                      
                      
                      -Employment
      contracts
                      
                      
                      1,147
                      
                      
                      
                      (1,147
                      )
                      
                      
                      -Patent
                      
                      
                      64
                      
                      
                      
                      (64
                      )
                      
                      
                      -Indefinite-lived
      trade name
                      
                      
                      5,680
                      
                      
                      
                      -
                      
                      
                      
                      5,680Total
                      
                      $
                      18,976
                      
                      
                      $
                      (7,364
                      )
                      
                      $
                      11,612




9


Amortization
expense related to the above intangible assets for the three months and six
months ended June 30, 2009 was $335,382 and $1,053,024, respectively. The
aggregate amortization expense associated with intangible assets for the next
five years is estimated to be as follows (in thousands):





2009
      (six  months
      remaining)
                    
                    $
                    6712010
                    
                    
                    1,3422011
                    
                    
                    1,3422012
                    
                    
                    1,3422013
      and thereafter
                    
                    
                    1,235Total
                    
                    $
                    5,932





Goodwill
represents the excess of the purchase price over the fair value of the net
tangible assets. There have been no changes in the carrying amount of goodwill
for the six months ended June 30, 2009.





6.
Long-Term Debt





Debt
consists of the following (in thousands):


June
      30,
                            2009
                          
                          
                          December
      31,
                            200810%
      secured debentures
                          
                          $
                          16,250
                          
                          
                          $
                          20,250Debt
      discount
                          
                          
                          (7,136
                          )
                          
                          
                          (9,639
                          )10%
      secured debentures, net
                          
                          
                          9,114
                          
                          
                          
                          10,611Notes
      payable secured by assets acquired
                          
                          
                          5,542
                          
                          
                          
                          9,500Note
      payable – EIS acquisition
                          
                          
                          1,070
                          
                          
                          
                          1,320Total
      debt
                          
                          
                          15,726
                          
                          
                          
                          21,431Less:
      current maturities
                          
                          
                          (6,543
                          )
                          
                          
                          (11,110
                          )Total
      long-term debt
                          
                          $
                          9,183
                          
                          
                          $
                          10,321





10% secured
debentures





In
December 2007, the Company entered into a Purchase Agreement (the “Purchase
Agreement”) for the sale of $20,250,000 of 10% Secured Debentures (the
“Debentures”).  The Debentures are due on December 5, 2012, with
interest payable quarterly on January 1, April 1, July 1 and October 1. The
Debentures are secured by liens on all of the Company’s
assets.  Beginning December 1, 2008, the Company is required to make
quarterly principal payments of $1,265,625.  Any overdue accrued and
unpaid interest shall result in a late fee at an interest rate equal to the
lesser of 18% per annum or the maximum rate permitted by
law.  Prepayment is not allowed without prior written consent of the
holders. The purchasers of the debentures also received warrants which entitle
the holders to purchase up to 15,954,545 shares of the Company’s common stock at
$1.65 per share.  Under the Black-scholes method using an expected
life of five years, volatility of 72% and a risk-free interest rate of 3.28%,
the Company determined these warrants had a relative fair value of $13,085,380
as of the date of the transaction.  The relative fair value of the
warrants was originally recorded as additional paid-in capital with a
corresponding amount recorded as a debt discount.  Upon adoption of
EITF 07-5, the debt discount was adjusted and the fair value of the warrants was
reclassified to a derivative liability. The net adjustment to the debt discount
of $39,579 was recorded as a cumulative effect of change in accounting principle
with an offsetting credit to retained earnings. See note 7 for further
discussion of the derivative liability. The debt discount is being amortized to
interest expense over the life of the debentures, which mature on December 1,
2012.  For the three months and six months ending June 30, 2009,
approximately $1,155,000 and $2,543,000, respectively, of debt discount was
amortized to interest expense.




10


Epic did
not make the December 1, 2008 principal payment when due and this resulted in an
event of default. On February 26, 2009, the Company entered into an Amendment
Agreement (the “Amendment”) with all of the holders of the Debentures (the
“Holders”) except for one holder of a $250,000 Debenture, to amend the Purchase
Agreement and the Debentures. Under the Amendment, the Company paid the amounts
due and the Debenture Holders agreed to waive any Events of Default (as defined
in the Debenture and other documents executed in connection with the purchase of
the Debentures) of which they had knowledge.  Also, to the extent that
a Holder had requested acceleration of payment of its Debenture, the Holder
rescinded such request and any resulting acceleration of its
Debenture.  Also, the Amendment amends the Purchase Agreement by
adding three additional sections to the Purchase Agreement.  The first
new section provides that the Company shall achieve, on a consolidated basis,
EBITDA (as defined in the Amendment) of at least the required amount set forth
below for the applicable period indicated:





Period
                      
                      Cumulative EBITDAFor
      the three months ending March 31, 2009
                      
                      
                      100,000For
      the six months ending June 30, 2009
                      
                      
                      1,500,000For
      the nine months ending September 30, 2009
                      
                      
                      3,400,000For
      the twelve months ending December 31, 2009
                      
                      
                      4,400,000





In
addition, the Amendment provides that for each three-month period commencing on
January 1, 2010 and ending on each March 31, June 30, September 30 and December
31 thereafter, the Company shall achieve, on a consolidated basis, EBITDA of at
least $1,000,000. The Amendment also provides that until June 30, 2010, the
Company is only permitted to issue up to a maximum aggregate of 10,000,000
shares of common stock (with options and warrants counted as Shares) (subject to
adjustment) to employees, consultants, officers, directors and
advisors.  The Company also will not issue any shares of common stock
or options or warrants to employees, consultants, officers, directors or
advisors with a strike price, conversion price, exercise price, or at an
effective purchase price per share, less than $0.50 (subject to adjustment)
until the earlier of (i) such time that the Purchasers no longer hold any
Securities or (ii) one year prior to the expiration date of the Warrants
(regardless of whether any or all Warrants have been exercised). Another
addition to the Purchase Agreement is that it places limitations on increases to
executive compensation beyond the 2008 levels for calendar years 2009 and
2010.  The limitations shall last until the end of calendar year 2010,
or until such time that the Company’s annual EBITDA (as derived from audited
financial statements) exceeds $7,000,000, or the holders of at least 67% in
principal amount of the then outstanding Debentures shall have otherwise given
their prior written consent to terminate the limitations.





The
Amendment also provides that following any and all payments received by the
Company or any subsidiary of the Company in connection with the amounts owed to
the Company by its customer who filed bankruptcy, that were due and payable as
of November 10, 2008, the Company will redeem some or all of the
then-outstanding principal of the Debenture, in an amount equal to the Holders’
pro-rata portion of 50% of such payment.  An additional “Event of
Default” also was added to the Debenture.  It will be an Event of
Default if, upon opening or otherwise maintaining any deposit account or bank
account, the Company does not enter into an account control
agreement  for the benefit of the Holders with respect to the subject
deposit account or bank account.





On March
13, 2009, the Company entered into a Debenture Repurchase Agreement (“Repurchase
agreement”) with a Holders who did not agree to the Amendment. Under the
provisions of the Repurchase agreement the Company repurchased a Debenture with
a principal amount of $250,000 for $156,250. For the three months ended March
31, 2009, the Company recorded a gain on extinguishment of $93,750 which is
included in interest and other income (expense) in the accompanying Consolidated
Statement of Operations.





Note payable – EIS
acquisition





In
connection with the acquisition of EIS in February 2008, the Company entered
into a $1,400,000 note payable (the “EIS note”) which will be paid to the prior
owners of EIS in periodic installments. On February 20, 2009, the parties to the
EIS note agreed that the schedule for the Company’s payment of the remaining
balance shall be amended as follows: $250,000 on April 1, 2010, $250,000 on July
1, 2010, $250,000 on October 1, 2010, and $320,000 on January 1, 2011
(collectively “Cash Payments”). Each of the Cash Payments will be allocated
among Joseph Allen Wright (“Wright”), Richard Dean Harvey (“R. Harvey”) and
Traci Marlene Harvey (“T. Harvey”) on a percentage basis, with Wright receiving
50%, R. Harvey receiving 25%, and T. Harvey receiving 25% of the Cash
Payments.




Notes payable secured by
assets acquired




At
December 31, 2008, the Company had a $2,500,000 note payable secured by the Rush
County Kansas property. The note is for a term of 42 months and bears annual
interest of 10% with principal and interest payable monthly. Pursuant to the
note agreement, if the cash flow from the property is less than the monthly
principal and interest payment, the deficit is added to the principal amount of
the note. If the cash flow from the property is greater than the monthly
principal and interest, the additional amount reduces the principal of the note.
At December 31, 2008, the balance of this note was $3,295,000 and was included
in current liabilities associated with assets held for sale in the accompanying
Consolidated Balance Sheet. In February 2009, the Company sold the properties
associated with this note payable and the note payable was assumed by the third
party.




11


The
Company has a $4,845,000 note payable related to its aircraft.  The 12-year
note with an annual interest rate of 6.81% is due on November 27, 2018, with
principal and interest payable monthly. At June 30, 2009 and December 31, 2008,
this note payable had a balance of $4,107,000 and $4,260,000, respectively and
no accrued interest.  At June 30, 2009 and December 31, 2008, the
current portion of this note is $322,000 and $311,000, respectively, and is
included in current liabilities associated with assets held for sale in the
accompanying Consolidated Balance Sheets. At June 30, 2009 and December 31,
2008, the long-term portion of this note is $3,785,000 and $3,949,000,
respectively, and is included in long-term liabilities associated with assets
held for sale in the accompanying Consolidated Balance Sheets.





The
Company has a $100,000 note payable related to tenant improvements at its
expanded Lakewood, Colorado office.  The 5 year note with a 5% annual
interest rate is due on May 1, 2012, with principal and interest payable
monthly.  At June 30, 2009 and December 31, 2008, this note payable had a
balance of $58,000 and $68,000, respectively.





The
Company has a $872,909 note payable related to its Microsoft ERP system
implementation.  The 3-year note with a 7.25% annual interest rate is due
on June 18, 2010, with principal and interest payable monthly. At June 30, 2009
and December 31, 2008, this note payable had a balance of $312,000 and $460,000,
respectively.





The
Company has various notes payable to finance the Company owned vehicles utilized
for field services. The 3-year notes with an annual interest rate of 5.50% are
due April 1, 2011 thru December 1, 2011, with principal and interest payable
monthly. At June 30, 2009 and December 31, 2008, these notes payable had
balances of $1,065,000 and $1,417,000, respectively.





7.
Derivatives





On
January 1, 2009 the Company adopted EITF 07-5 and as a result 22,685,031
outstanding warrants of the Company containing exercise price reset provisions,
which were previously classified in equity, were reclassified to a derivative
liability as of January 1, 2009 as these warrants were no longer deemed to be
indexed to the Company’s own stock.   These warrants have
exercise prices ranging from $1.50 - $1.65 and expire in December 2012. As of
January 1, 2009, the fair value of these warrants of $787,340 was recognized and
resulted in a cumulative effect adjustment to retained earnings of $20,791,677.
The change in fair value during the three and six months ended June 30, 2009 of
$2,420,731 and $2,625,744 is recorded as a derivative loss in the accompanying
Consolidated Statements of Operations.





8. Stockholders'
Equity





During
the six months ended June 30, 2009, the Company issued 610,621 share of its
common stock to key employees of Pearl. These shares are related to the
acquisition of Pearl in 2007 and were issued during the six months ended June
30, 2009 as they met the vesting requirements during this period.





9.
Stock Based Compensation





Stock
Options


During
the six months ended June 30, 2009, 100,000 options expired and 531,000 stock
options were forfeited.  A summary of stock option activity for the
six months ended June 30, 2009 is as follows:





Number
      of
                        Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        PriceOptions
      outstanding, December 31, 2008
                      
                      
                      2,541,500
                      
                      
                      $
                      2.03Options granted
                      
                      
                      -
                      
                      
                      
                      -Options
      exercised
                      
                      
                      -
                      
                      
                      
                      -Options
      expired/forfeited
                      
                      
                      (572,600
                      )
                      
                      $
                      2.73Options
      outstanding, June 30, 2009
                      
                      
                      1,968,900
                      
                      
                      $
                      1.83




12


Restricted
Stock


During
the six months ended June 30, 2009, 1,800,000 unvested restricted stock grants
were forfeited.  A summary of restricted stock activity for the six
months ended June 30, 2009 is as follows:





Non-vested
      restricted stock, January 1, 2009
                    
                    
                    3,600,000Granted
                    
                    
                    -Vested
                    
                    
                    -Forfeited
                    
                    
                    (1,800,000
                    )Non-vested
      restricted stock, June 30, 2009
                    
                    
                    1,800,000





10.
Commitments and Contingencies





Litigation




On June
15, 2009, the Company filed a lawsuit in the District Court of Montgomery
County, Texas against Rex Doyle, Epic’s former Chief Executive Officer and
Director, for employment-related claims.  Mr. Doyle subsequently filed
a counter-claim against the Company. On June 24, 2009, the Company and Mr. Doyle
entered into an agreement titled Severance and Cooperation Agreement (the
“Agreement”), effective July 2, 2009 (the “Effective Date”).  Pursuant
to the Agreement, both the Company and Mr. Doyle agreed to mutual releases of
all claims and liabilities existing as of the Effective Date. The Company has
$500,000 accrued related to the Agreement which is included in Accrued
liabilities in the accompanying Consolidated Balance Sheet.




From time
to time, the Company may be involved in litigation or administrative proceedings
relating to claims arising out of our operations in the normal course of
business.  The Company is not aware of any pending or threatened legal
proceedings that, if determined in a manner adverse, could have a material
adverse effect on the Company’s business and operations.




13





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




The
discussion in this section contains forward-looking statements. These statements
relate to future events or our future financial performance. We have attempted
to identify forward-looking statements by terminology such as "anticipate,"
"believe," "can," "continue," "could," "estimate," "expect," "intend," "may,"
"plan," "potential," "predict," "should," "would" or "will" or the negative of
these terms or other comparable terminology, but their absence does not mean
that a statement is not forward looking. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors, which
could cause our actual results to differ from those projected in any
forward-looking statements we make This discussion should be read with our
financial statements and related notes included elsewhere in this
report.





Overview





Epic
Energy Resources, Inc. (“Epic”) was incorporated in 1989.  Following
its formation, Epic was relatively inactive until April 2006 when its management
changed and it became involved in the oil and gas industry. Epic acquired
certain producing oil and gas properties in December 2006 which were shut-in
between January 2007 and August 2008 and sold in February 2009.  Epic
acquired The Carnrite Group (“Carnrite”) in August 2007, Pearl Investment
Company (“Pearl”) in December 2007 and Epic Integrated Services LLC (“EIS”) in
February 2008.  Epic’s revenues from Carnrite, Pearl and EIS are
principally derived from consulting and engineering services to the oil, gas and
energy industry.  Carnrite’s management consulting services provide
advice to keep companies engaged in the oil and gas sector competitive in the
global market. Pearl provides engineering and consulting services focused on the
design, build, operations, maintenance, and development of upstream and
midstream oil and gas assets including associated gathering, compression and
processing facilities. EIS provides consulting services focused on personnel
training, documentation and data management to the oil, gas and energy
industry.  With respect to this discussion, the terms “the Company”,
“we,” “us,” and “our” refer to Epic Energy Resources, Inc. and our wholly-owned
subsidiaries.





Critical
Accounting Policies





This
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements. The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts. On an ongoing basis, we evaluate our estimates, including
those related to bad debts, intangible assets, long-lived assets, income taxes,
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions and factors that we believe to be reasonable under
the circumstances. Based on our ongoing review, we make adjustments we consider
appropriate under the facts and circumstances. The accompanying condensed
unaudited consolidated financial statements are prepared using the same critical
accounting policies discussed in our 2008 Annual Report on Form
10-K.




Results
of Operations





The
results of operations for the six months ended June 30, 2008 include the
historical results of EIS from January 1, 2008.





In
February 2009, the Company sold its Kansas property to a third party who assumed
the note payable, including accrued but unpaid interest totaling $3,993,071 at
the acquisition date and future profits interest in the properties of Statesman
Resources, Inc. subject to the Company’s retention of an overriding royalty
interest covering the Kansas property.  The Company recorded a
$2,110,066 gain on the sale of the Kansas property in February
2009.  For the three and six months ended June 30, 2009 and 2008,
revenue and expenses directly related to oil and gas production are included in
Loss from discontinued operations.





The
Company grew significantly from prior periods through the acquisitions of
Carnrite, Pearl and EIS.  We plan to strategically continue our growth
in geographic regions where our engineering expertise is our strength. Such
regions include domestically the Rocky Mountains and Mid-Continent regions,
including Texas and the Gulf Coast Region and internationally. As we build our
infrastructure, we expect to expand our service region throughout the U. S.
lower 48 and into foreign countries that are seeking our expertise.





As of
July 31, 2009, the Company’s backlog for consulting services to be performed in
the future was approximately $28.0     million. This
compares with a combined backlog of approximately $45.8 million as of July 31,
2008. This backlog amount could change by macro-economic market activity and
customer demand changes.




14


Three
Months ended June 30, 2009 compared with Three Months ended June 30,
2008





Revenues were approximately $10.5
million for the quarter ended June 30, 2009 compared to approximately $16.6
million for the quarter ended June 30, 2008. The decrease of $6.1 million was
attributable to a $4.2 million decrease in revenues from reimbursed expenses and
a $1.9 million decrease in consulting fees.





Operating
Expenseswere approximately $10.2 million for the quarter ended June 30,
2009 compared to approximately $18.8 million for the quarter ended June 30, 2008
resulting in a decrease of $8.6 million.  This $8.6 million decrease
was primarily related to a $2.5 million decrease in compensation and benefits
and a $3.9 million decrease in reimbursed expenses as it relates to the decrease
in revenues from reimbursed expenses. Also contributing to the decrease in
operating expenses was a $1.9 million decrease in general and administrative
expenses and a $0.8 million decrease in professional and subcontracted
services.





Income (loss)
from Operationswas approximately $0.3 million for the quarter ended June
30, 2009 compared to a loss of $2.2 million for the quarter ended June 30, 2008.
This improvement resulted from the excess of the decrease in operating expenses
as compared with the decrease in revenues.





Other Expense,
netwas approximately $4.2 million for the quarter ended June 30, 2009
compared to approximately $1.7 million for the quarter ended June 30,
2008.  The increase of $2.5 million was primarily due to the loss on
the derivative liability of $2.4 million.





Net
Loss  was $3.9 million or $0.09 per share for the quarter ended
June 30, 2009 compared to $3.8 million or $0.09 per share for the quarter ended
June 30, 2008 resulting in an increased loss of
$0.1  million.  The primary reasons for the net loss for the
three months ended June 30, 2009 was the derivative loss of $2.4 million and
$1.8 million of interest expense recognized during that period.





Six
Months ended June 30, 2009 compared with Six Months ended June 30,
2008





Revenues were approximately $19.5
million for the six months ended June 30, 2009 compared to approximately $34.1
million for the six months ended June 30, 2008. The decrease of $14.6 million
was attributable to a $12.4 million decrease in revenues from reimbursed
expenses and a $2.2 million decrease in consulting fees.





Operating
Expenseswere approximately $20.0 million for the six months ended June
30, 2009 compared to approximately $36.1 million for the six months ended June
30, 2008.  This decrease of $16.1 million was primarily related to a
$3.4 million decrease in compensation and benefits and a $8.8 million decrease
in reimbursed expenses as it relates to the decrease in revenues from reimbursed
expenses. Also contributing to the decrease in operating expenses was a $3.3
million decrease in general and administrative expenses and a $1.8 million
decrease in professional and subcontracted services.





Loss from
Operationswas approximately $0.5 million for the six months ended June
30, 2009 compared to a loss of approximately $2.0 million for the six months
ended June 30, 2008. This improvement resulted from the excess of the decrease
in operating expenses as compared with the decrease in revenues.





Other Expense,
netwas approximately $6.4 million for the six months ended June 30, 2009
compared to approximately $3.0 million for the six months ended June 30,
2008.  The increase of $3.4 million was primarily due to the loss on
the derivative liability of $2.6 million and an increase in interest expense of
$0.8 million related to the debt discount amortization.





Net Losswas $4.9 million or $0.11 per share for the six months ended June 30,
2009 compared to $5.1 million or $0.12 per share for the six months ended June
30, 2008 resulting in a decreased loss of $0.2 million. The primary reasons for
the net loss for the six months ended June 30, 2009 was the derivative loss of
$2.6 million and $3.9 million of interest expense recognized for that
period.




15




Liquidity
and Capital Resources





On
February 26, 2009, the Company entered into an Amendment Agreement (the
“Amendment”) with all of the holders (the “Holders”) of the Company’s 10%
Secured Debentures except for one holder of a $250,000 Debenture. Under the
Amendment, the Company paid the past due amounts on the Debentures, and the
Debenture Holders agreed to waive any Events of Default (as defined in the
Debenture and other documents executed in connection with the purchase of the
Debentures) of which they had knowledge.  Also, to the extent that a
Holder had requested acceleration of payment of its Debenture, the Holder
rescinded such request and any resulting acceleration of its
Debenture.  The Amendment also added requirements for the Company to
achieve specified levels of EBITDA as well as certain restrictions as described
in Note 6 to the financial statements that are included in this Form 10-Q
report. On March 13, 2009, the Company entered into a Debenture Repurchase
Agreement (“Repurchase Agreement”) with a Debenture Holder who did not agree to
the Amendment. Under the provisions of the Repurchase Agreement the Company
repurchased a principal amount of $250,000 for $156,250.





In
February 2009, the Company sold the Kansas property to a third party who assumed
the note payable, including accrued but unpaid interest totaling $3,993,071 at
the acquisition date and future profits interest in the properties of Statesman
Resources, Inc subject to the Company’s retention of an overriding royalty
interest covering the Kansas property. During the three months ended March 31,
2009, the Company recorded a $2,110,066 gain on the sale of the Kansas
property.





Operating
activities provided cash of $3.4 million for the six months ended June 30, 2009
compared to approximately $1.0 million for the six months ended June 30,
2008.  We had a net loss of $4.9 million for the six months ended June
30, 2009 which was offset by changes in assets and liabilities of approximately
$2.3 million.  In addition during the six months ended June 30, 2009,
we had approximately $2.8 million of amortization of debt discount and debt
issuance costs, $1.9 million of depreciation and amortization, and $2.6 million
of derivative loss. For the six months ended June 30, 2008, we had a net loss of
$5.1 million which was offset by changes in assets and liabilities of
approximately $2.0 million, $1.6 million of amortization of debt discount and
debt issuance costs, $0.9 million of depreciation and amortization and other
$0.9 million of stock based compensation expense.





For the
six months ended June 30, 2009, we used $0.1 million of cash flows for investing
activities for the acquisition of property and equipment offset by proceeds from
the sale of property and equipment. For the six months ended June 30, 2008, we
had investing activities that provided cash of approximately $0.9 million
primarily related to $2.3 million increase in restricted cash offset by $1.2
million used for the acquisition of property and equipment.





For the
six months ended June 30, 2009, we used $4.8 million of cash flows for financing
activities for debt payments.  For the six months ended June 30, 2008,
we used $3.9 million of cash flows for financing activities of which$3.4 million
was related to a decrease in bank overdrafts and $0.5 million was for debt
payments.





As of
June 30, 2009, we had working capital deficit of $8.9 million compared with the
working capital deficit of $10.4 million at December 31, 2008.





The
Company estimates that its resources are sufficient to fund its needs through
the twelve months subsequent to June 30, 2009.  There are no
assurances that the Company will become profitable or generate positive cash
flow by the end of 2009 or, in the alternative, be successful in funding its
needs through June 30, 2010.





Contractual
Commitments





There
have been no material changes to Epic’s contractual commitments during the six
months ended June 30, 2009 (except as noted above).  Please see Note 6
to the financial statements contained in this Form 10-Q and the Company’s Form
10-K for December 31, 2008 for a complete discussion of the Company’s debt
obligations.





Except
for the commitments arising from our operating leases arrangements, we have no
other off-balance sheet arrangements that are reasonably likely to have a
material effect on our financial statements.


16




Safety




Working
safely is a major objective at Epic. We believe this organization-wide objective
provides for a safer work environment for employees, reduces our costs and
enhances our reputation. Furthermore, striving to be a world-class leader in
safety provides a platform for all employees to understand and apply the resolve
necessary to be a high-performing organization. We measure our progress on
safety based on Recordable Incidence Rate (“RIR”) as defined by OSHA. For the
six month period ending June 30, 2009, the Company had no reportable
incidents.  We continued to increase the number of training hours and
worked judiciously to reduce the Company’s RIR’s.




ITEM
4T. CONTROLS AND PROCEDURES





(a)
Disclosure Controls and Procedures




John S.
Ippolito,Epic's
President and Chief Executive Officer and Michael Kinney, Epic’s Chief Financial
Officer, evaluated the effectiveness of Epic's disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934)
as of the end of the period covered by this report. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to apply its
judgment in evaluating the benefits of possible controls and procedures relative
to their costs. Based upon their evaluation, Ippolito and Kinney have concluded
that the Company’s disclosure control and procedures were  effective
as of June 30, 2009.




(b)
Changes in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule
15d-15 under the Exchange Act that occurred during the quarter ended June 30,
2009 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.




17




PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





On June
15, 2009, Epic filed a lawsuit in the District Court of Montgomery County, Texas
against Rex Doyle, Epic’s former Chief Executive Officer and Director, for
employment-related claims.  Mr. Doyle subsequently filed a
counter-claim against Epic.  On June 24, 2009, Epic and Mr. Doyle
entered into an agreement titled Severance and Cooperation Agreement (the
“Agreement”), effective July 2, 2009 (the “Effective Date”).  Pursuant
to the Agreement, both Epic and Mr. Doyle agreed to mutual releases of all
claims and liabilities existing as of the Effective Date.  A copy of
the Agreement was filed with the SEC on June 30, 2009 on Form 8-K, and the
lawsuit has been dismissed.





ITEM
6. EXHIBITS




Exhibit
                      Number
                    
                    Exhibit Name3.1
                    
                    Articles
      of Incorporation
                    
                    Incorporated
      by reference, and as same exhibit number, from the Company’s Registration
      Statement on Form 10-SB filed on August 22, 2000 (Commission File No.
      000-31357).3.2
                    
                    Amendments
      to Articles of Incorporation
                    
                    Incorporated
      by reference, and as same exhibit number, from the Company's Registration
      Statement on Form SB-2 filed on January 4, 2008 (Commission File No.
      333-148479)3.3
                    
                    Bylaws
                    
                    Incorporated
      by reference, and as same  exhibit number, from the Company's
      Registration Statement on Form  SB-2 filed on January 4, 2008
      (Commission File No. 333-148479)3.4
                    
                    Amendment
      to Article III, Section 5 of the Bylaws
                    
                    Incorporated
      by reference to Exhibit 3.1 to the Company’s report on Form 8-K dated June
      30, 2009.10.1
                    
                    Agreement
      relating to the acquisition of the Carnrite Group, LLC
                    
                    Incorporated
      by reference to Exhibit 10 to the Company's report on Form 8-K dated
      August 10, 2007.10.2
                    
                    Agreement
      relating to the acquisition of Pearl Investment Company.
                    
                    Incorporated
      by reference to Exhibit 10.1 to the Company's report on Form 8-K dated
      December 5, 2007.10.3
                    
                    Securities
      Purchase Agreement (together with schedule required by Instruction 2 to
      Item 601 of Regulation S-K) pertaining to the sale of common stock and
      warrants.
                    
                    Incorporated
      by reference to Exhibit 10.2 to the Company's report on Form 8-K dated
      December 5, 2007.10.4
                    
                    Purchase
      Agreement (together with schedule required by Instruction 2 to Item 601 of
      Regulation S-K) pertaining to the sale of the notes and
      warrants.
                    
                    Incorporated
      by reference to Exhibit 10.3 to the Company's report on Form 8-K dated
      December 5, 2007.10.5
                    
                    Agreement
      relating to the acquisition of Epic Integrated Solutions
    LLC.
                    
                    Incorporated
      by reference to Exhibit 10 to the Company’s report on Form 10-K filed on
      April 4, 2008.
  18
  Exhibit
                    Number
                  
                  Exhibit Name10.6*
                  
                  Employment
      Agreement R. Rhinesmith.
                  
                  Incorporated
      by reference to Exhibit 10.6 to the following Form S-1/A filed May 13,
      2008.10.7*
                  
                  Employment
      Agreement with Patrick Murray.
                  
                  Incorporated
      by reference to Exhibit 10.6 to the Company’s Form S-1/A filed May 13,
      2008.10.8
                  
                  Gas
      Purchase Agreement with IACX Energy, LLC
                  
                  Incorporated
      by reference to exhibit 10.8 to the Company; Form S-1/A filed July 9,
      2008.10.9*
                  
                  Consulting
      Agreement with R. Rhinesmith
                  
                  Incorporated
      by reference to Exhibit 10.9 to the Company; Form S-1/A filed July 9,
      2008.10.10*
                  
                  Separation
      and Release Agreement with D. Reynolds.
                  
                  Incorporated
      by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 3,
      2008.10.11
                  
                  Amendment
      Agreement dated February 26, 2009
                  
                  Incorporated
      by reference to Exhibit 10.1 to the Company’s Form 8-K filed March 2,
      2009.10.12
                  
                  Severance
      and Cooperation Agreement
                  
                  Incorporated
      by reference to Exhibit 10.1 to the Company’s Form 8-K filed June 30,
      2009.31.1
                  
                  Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
                  
                  Filed
      herein.31.2
                  
                  Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
                  
                  Filed
      herein.32
                  
                  Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
                  
                  Filed
      herein.


An
asterisk (*) beside an exhibit number indicates the exhibit contains a
management contract, compensatory plan or arrangement which is required to be
identified in this report.




19




SIGNATURES





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





EPIC
      ENERGY RESOURCES, INC.(Registrant)Date:
      August 6, 2009
              /s/
      John S. IppolitoChief
      Executive Officer, President and PrincipalExecutive
       OfficerDate:
      August 6, 2009
              /s/
      Michael KinneyChief  Financial
      Officer, Executive VicePresident and Principal Accounting
      Officer




20