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 MARCH 31, 2009




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




For the
transition period from _______ to ________.




Commission
File Number 0-31357




EPIC ENERGY RESOURCES,
INC.


(Exact name of registrant as specified in its
charter)





Colorado
              94-3363969(State
      of incorporation)
              (I.R.S. Employer Identification No.)





1450 Lake
      Robbins Drive, Suite 160The
      Woodlands, TX 77380




(Address
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 proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:




YES x NO  ̈




Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files).


YES o NO x


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 May
12, 2009, the Company had 44,105,481 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  March 31, 2009 and December 31, 2008
      (unaudited)
                              2Consolidated
      Statements of Operations for the three months ended March 31, 2009 and
      2008 (unaudited)
                              3Consolidated
      Statement of Stockholders’ Equity for the three months ended March 31,
      2009 (unaudited)
                              4Consolidated
      Statements of Cash Flows for the three months ended March 31, 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
                              16PART
      II — OTHER INFORMATIONItem 6.
      Exhibits
                              17Signatures
                              19


1


EPIC
ENERGY RESOURCES INC


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)


(unaudited)




March
      31,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008ASSETSCurrent
      AssetsCash and cash
      equivalents
                                      
                                      $
                                      1,184
                                      
                                      
                                      $
                                      4,785Accounts
    receivable:Billed, net of allowance of
      $6,548  and $6,570, respectively
                                      
                                      
                                      12,961
                                      
                                      
                                      
                                      10,690Unbilled
                                      
                                      
                                      1,283
                                      
                                      
                                      
                                      388Prepaid expenses and other
      current assets
                                      
                                      
                                      2,063
                                      
                                      
                                      
                                      2,027Total current
    assets
                                      
                                      
                                      17,491
                                      
                                      
                                      
                                      17,890Property
      and equipment, net
                                      
                                      
                                      4,690
                                      
                                      
                                      
                                      5,136Assets
      held for sale:Proved
      oil and gas properties, (full cost method), net of accumulate depletion
      and impairments of $0 and $9,257, respectively
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,332Other
      mineral reserves
                                      
                                      
                                      -
                                      
                                      
                                      
                                      783Other asset held for
      sale
                                      
                                      
                                      3,875
                                      
                                      
                                      
                                      3,875Other
      assets
                                      
                                      
                                      53
                                      
                                      
                                      
                                      45Debt
      issuance costs, net of accumulated amortization of $591 and$481,
      respectively
                                      
                                      
                                      1,438
                                      
                                      
                                      
                                      1,548Goodwill
                                      
                                      
                                      18,837
                                      
                                      
                                      
                                      18,837Other
      Intangible assets, net
                                      
                                      
                                      11,948
                                      
                                      
                                      
                                      12,666Total assets
                                      
                                      $
                                      58,332
                                      
                                      
                                      $
                                      62,112LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts payable
                                      
                                      $
                                      3,927
                                      
                                      
                                      $
                                      5,404Accrued
    liabilities
                                      
                                      
                                      2,427
                                      
                                      
                                      
                                      3,762Deferred revenue
                                      
                                      
                                      8,308
                                      
                                      
                                      
                                      2,684Customer
deposits
                                      
                                      
                                      4,388
                                      
                                      
                                      
                                      4,505Current liabilities associated
      with assets held for sale
                                      
                                      
                                      341
                                      
                                      
                                      
                                      4,383Current portion of long term
      debt
                                      
                                      
                                      6,028
                                      
                                      
                                      
                                      7,504Total current
      liabilities
                                      
                                      
                                      25,419
                                      
                                      
                                      
                                      28,242Long-term
      liabilities associated with assets held for sale
                                      
                                      
                                      3,867
                                      
                                      
                                      
                                      3,949Long-term
      debt
                                      
                                      
                                      5,981
                                      
                                      
                                      
                                      6,372Derivative
      liability
                                      
                                      
                                      992
                                      
                                      
                                      
                                      -Deferred
      tax liability
                                      
                                      
                                      1,775
                                      
                                      
                                      
                                      1,775Total
      liabilities
                                      
                                      
                                      38,034
                                      
                                      
                                      
                                      40,338STOCKHOLDERS'
      EQUITYCommon
      stock, no par value: 100,000,000 authorized;  44,105,481 and
      43,495,160 shares issued and outstanding, respectively
                                      
                                      
                                      33,639
                                      
                                      
                                      
                                      41,783Additional paid-in
      capital
                                      
                                      
                                      1,911
                                      
                                      
                                      
                                      15,014Accumulated
    deficit
                                      
                                      
                                      (15,252
                                      )
                                      
                                      
                                      (35,023
                                      )Total
      stockholders’ equity
                                      
                                      
                                      20,298
                                      
                                      
                                      
                                      21,774Total
      liabilities and stockholders’ equity
                                      
                                      $
                                      58,332
                                      
                                      
                                      $
                                      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 March 31,2009
                                          
                                          
                                          2008REVENUESConsulting fees
                                          
                                          $
                                          7,774
                                          
                                          
                                          $
                                          8,082Reimbursed
    expenses
                                          
                                          
                                          1,240
                                          
                                          
                                          
                                          9,392Total revenues
                                          
                                          
                                          9,014
                                          
                                          
                                          
                                          17,474OPERATING
      EXPENSESReimbursed
    expenses
                                          
                                          
                                          1,044
                                          
                                          
                                          
                                          5,974Compensation and
      benefits
                                          
                                          
                                          5,248
                                          
                                          
                                          
                                          6,090General and
      administrative
                                          
                                          
                                          842
                                          
                                          
                                          
                                          2,220Professional and subcontracted
      services
                                          
                                          
                                          1,221
                                          
                                          
                                          
                                          2,223Occupancy, communication and
      other
                                          
                                          
                                          312
                                          
                                          
                                          
                                          398Depreciation, amortization and
      depletion
                                          
                                          
                                          1,122
                                          
                                          
                                          
                                          457Total operating
      expenses
                                          
                                          
                                          9,789
                                          
                                          
                                          
                                          17,362Income
      (loss) from operations
                                          
                                          
                                          (775
                                          )
                                          
                                          
                                          112OTHER
      INCOME (EXPENSE)Derivative loss
                                          
                                          
                                          (205
                                          )
                                          
                                          
                                          -Interest and other income
      (expense), net
                                          
                                          
                                          95
                                          
                                          
                                          
                                          28Interest expense
                                          
                                          
                                          (2,083
                                          )
                                          
                                          
                                          (1,400
                                          )Total other expense,
      net
                                          
                                          
                                          (2,193
                                          )
                                          
                                          
                                          (1,372
                                          )Loss
      from continuing operations
                                          
                                          
                                          (2,968
                                          )
                                          
                                          
                                          (1,260
                                          )DISCOUNTINUED
      OPERATIONSLoss from operations of oil and
      gas segment
                                          
                                          
                                          (162
                                          )
                                          
                                          
                                          (2
                                          )Gain on sale of oil and gas
      properties
                                          
                                          
                                          2,110
                                          
                                          
                                          
                                          -Income
      (loss) from discontinued operations
                                          
                                          
                                          1,948
                                          
                                          
                                          
                                          (2
                                          )Net Loss
                                          
                                          $
                                          (1,020
                                          )
                                          
                                          $
                                          (1,262
                                          )LOSS
      PER COMMON SHARE -   Basic and Diluted
                                          
                                          $
                                          (.02
                                          )
                                          
                                          $
                                          (.03
                                          )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING – Basic and Diluted
                                          
                                          
                                          43,969,854
                                          
                                          
                                          
                                          42,948,921




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
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      292
                      
                      
                      
                      -
                      
                      
                      
                      292Issuance
      of vested shares
                      
                      
                      610,321
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,020
                      )
                      
                      
                      (1,020
                      )BALANCE,
      March 31, 2009
                      
                      
                      44,105,481
                      
                      
                      $
                      33,639
                      
                      
                      $
                      1,911
                      
                      
                      $
                      (15,252
                      )
                      
                      $
                      20,298




See
accompanying notes to unaudited consolidated financial
statements


4





EPIC
ENERGY RESOURCES INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)


(unaudited)




Three Months Ended March 31,2009
                                  
                                  
                                  2008OPERATING
      ACTIVITIES:Net loss
                                  
                                  $
                                  (1,020
                                  )
                                  
                                  $
                                  (1,262
                                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation, amortization and
      depletion
                                  
                                  
                                  1,122
                                  
                                  
                                  
                                  457Allowance for doubtful
      accounts
                                  
                                  
                                  (22
                                  )
                                  
                                  
                                  -Amortization of debt discount
      and debt issuance costs
                                  
                                  
                                  1,499
                                  
                                  
                                  
                                  771Stock-based compensation
      expense
                                  
                                  
                                  292
                                  
                                  
                                  
                                  258Loss on sale of property and
      equipment
                                  
                                  
                                  83
                                  
                                  
                                  
                                  -Lease operating
      expense
                                  
                                  
                                  98
                                  
                                  
                                  
                                  60Accretion
    expense
                                  
                                  
                                  1
                                  
                                  
                                  
                                  2Change in fair value of
      derivative liability
                                  
                                  
                                  205
                                  
                                  
                                  
                                  -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
                                  
                                  
                                  (3,144
                                  )
                                  
                                  
                                  514Prepaid expenses and other
      current assets
                                  
                                  
                                  (36
                                  )
                                  
                                  
                                  102Other non-current
      assets
                                  
                                  
                                  (8
                                  )
                                  
                                  
                                  (10
                                  )Accounts
payable
                                  
                                  
                                  (1,477
                                  )
                                  
                                  
                                  (169
                                  )Accrued
    liabilities
                                  
                                  
                                  (1,258
                                  )
                                  
                                  
                                  1,169Customer
    deposits
                                  
                                  
                                  (117
                                  )
                                  
                                  
                                  1,726Deferred
revenue
                                  
                                  
                                  5,624
                                  
                                  
                                  
                                  -Net cash provided by (used in)
      operating activities
                                  
                                  
                                  (362
                                  )
                                  
                                  
                                  3,618INVESTING
      ACTIVITIES:Increase (decrease) in
      restricted cash
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,000Purchases of property and
      equipment
                                  
                                  
                                  (94
                                  )
                                  
                                  
                                  (331
                                  )Proceeds from sale of property
      and equipment
                                  
                                  
                                  53
                                  
                                  
                                  
                                  -Acquisition of EIS, net of cash
      received
                                  
                                  
                                  -
                                  
                                  
                                  
                                  35Net
      cash provided by (used in) investing activities
                                  
                                  
                                  (41
                                  )
                                  
                                  
                                  704FINANCING
      ACTIVITIES:Bank overdrafts
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,815
                                  )Payments on debt
                                  
                                  
                                  (3,198
                                  )
                                  
                                  
                                  (318
                                  )Cash
      used in financing activities
                                  
                                  
                                  (3,198
                                  )
                                  
                                  
                                  (3,133
                                  )Net
      increase (decrease) in Cash and Cash Equivalents
                                  
                                  
                                  (3,601
                                  )
                                  
                                  
                                  1,189Cash
      and Cash Equivalents, Beginning of period
                                  
                                  
                                  4,785
                                  
                                  
                                  
                                  3,483Cash
      and Cash Equivalents, End of period
                                  
                                  $
                                  1,184
                                  
                                  
                                  $
                                  4,672SUPPLEMENTAL
      CASH FLOW DISCLOSURES:Cash
      paid for Interest
                                  
                                  $
                                  1,217
                                  
                                  
                                  $
                                  629NON-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
                                  
                                  
                                  $
                                  -Stock
      issued  for EIS acquisition
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,050Notes
      payable used to acquired property and equipment
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  241




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”), and Epic Integrated Solutions, LLC
(“EIS”). 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, or 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 three months ended March 31, 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.             Significant
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 months ended March 31, 2008
consolidated financial statements have been reclassified to conform with the
three months ended March 31, 2009 financial statement presentation. There is no
effect on net income, cash flows or stockholders’ equity as a result of these
reclassifications.





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.


6




The
Company reviews its 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 March 31, 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 their debt that are treated as a discount on the notes. Such
financial instruments are initially recorded at fair value and amortized to
interest expense during the life of the debt.




The
Company utilizes various types of financing to fund its business needs,
including debt with warrants attached and other instruments indexed to its
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 its hierarchy disclosures each
quarter. The Company’s only asset or liability measured at fair value on a
recurring basis is its 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 3.75 years, volatility of 151% and a risk-free interest rate of 1.41%,
the Company determined the fair value of the warrants to be $992,353 at March
31, 2009.





The
following shows the changes in the Level three liability measured on a recurring
basis for the quarter ended March 31, 2009:





Beginning
      balance
                          
                          $
                          787,340Total
      derivative loss
                          
                          
                          205,013Ending
      balance
                          
                          $
                          992,353




Recent
Accounting Pronouncements




Recently Adopted Accounting
Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(“FAS 141R”). FAS 141R significantly changes the accounting for
business combinations and will impact financial statements both on the
acquisition date and in subsequent periods.  Under FAS 141R, an
acquiring entity will be required to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree, measured
at their fair values as of the acquisition date, with limited
exceptions.  FAS 141R includes a substantial number of new disclosure
requirements that enable the evaluation of the nature and financial effects of
the business combination.  FAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period  beginning on or after December 15,
2008. The adoption of FAS 141R, effective January 1, 2009, did not have an
impact on the consolidated financial position, results of operations or cash
flows of the Company.


7




In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51(“FAS 160”). FAS 160 establishes new accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the non-controlling interest, changes in a parent’s ownership
interest, and the valuation of retained non-controlling equity investments when
a subsidiary is deconsolidated. FAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. FAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The adoption of FAS 160, effective January 1,
2009, did not have an impact on the consolidated financial position, results of
operations or cash flows of the Company.





In March
2008, the FASB issued 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 was effective for fiscal years beginning after
November 15, 2008. As of March 31, 2009, the Company has a derivative
liability of $992,353 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.




In April
2008, the FASB issued Staff Position No. FAS 142-3, Determination of Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FAS 142. FSP
FAS 142-3 also requires expanded disclosures related to the determination of
intangible asset useful lives. This standard applies prospectively to intangible
assets acquired and/or recognized on or after January 1, 2009. The adoption
of FSP FAS 142-3 effective January 1, 2009, did not have an impact on the
consolidated financial position, results of operations or cash flows of the
Company.





In May
2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“FAS 162”).  FAS 162 is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statement
of nongovernmental entities that are presented in conformity with
GAAP.  This statement will be effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendment to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.”  The adoption of this statement is
not expected to have a material impact on the Company’s consolidated financial
position or results of operations.





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 8 for further discussion.





On
January 1, 2009, the Company adopted SFAS No. 157, Fair Value of Financial
Instruments, (“SFAS 157”) as delayed by FSP 157-2-2 for all non-financial
assets and non-financial liabilities.  SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information.  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..





Recently Issued Accounting
Standards





In April
2009, the Financial Accounting Standards Board (“FASB”) issued the following new
accounting standards:


8





·
            FASB
      Staff Position FAS 157-4, Determining Whether a Market
      Is Not Active and a Transaction Is Not Distressed,(“FSP FAS
      157-4”) provides guidelines for making fair value measurements more
      consistent with the principles presented in SFAS 157.  FSP FAS
      157-4 provides additional authoritative guidance in determining whether a
      market is active or inactive and whether a transaction is distressed. It
      is applicable to all assets and liabilities (i.e., financial and
      non-financial) and will require enhanced
  disclosures.





·
            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.





These
standards are effective for periods ending after June 15, 2009. We are
evaluating the impact that these standards will have on our financial
statements.





3.
Property and Equipment





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





March
      31,
                      2009
                    
                    
                    December
      31,
                      2008Vehicles
                    
                    $
                    2,551
                    
                    
                    $
                    2,731Computer
      equipment
                    
                    
                    2,535
                    
                    
                    
                    2,521Office
      furniture and equipment
                    
                    
                    825
                    
                    
                    
                    825Leasehold
      improvements
                    
                    
                    555
                    
                    
                    
                    555Construction
      in progress
                    
                    
                    80
                    
                    
                    
                    -6,546
                    
                    
                    
                    6,632Less:
      Accumulated depreciation and amortization
                    
                    
                    (1,856
                    )
                    
                    
                    (1,496
                    )Total
      property and equipment, net
                    
                    $
                    4,690
                    
                    
                    $
                    5,136





Depreciation
expense for the three months ended March 31, 2009 and 2008 was $405,000 and
$442,000, respectively.





In 2008,
the Company adopted a plan to dispose of its airplane. The Company expects that
the final sale and disposal of the airplane 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 this asset is no longer depreciated.




4.
Oil and Gas Properties





In
February 2009, the Company sold the Kansas and Oklahoma properties together with
Epic’s future profits interest in the properties of Statesman Resources, Inc to
a third party, subject to the Company’s retention of an overriding royalty
interest covering the Kansas property. As part of the transaction, the note payable secured by
the Kansas and Oklahoma properties,
including accrued but unpaid interest totaling $3,993,071 at the acquisition
date, was cancelled by Bear Petroleum,
Inc.During the three months ended March 31, 2009, the
Company recorded a $2,110,066 gain on the sale of the Kansas and Oklahoma
properties, which is included in discontinued operations in the accompanying
consolidated statement of operations.  The properties and their
related asset 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


9


5.  Goodwill
and Other Intangible Assets





The
Company’s intangible assets consist of the following at March 31, 2009 (in
thousands):





Carrying
                      amount
                    
                    
                    Accumulated
                      amortization
                    
                    
                    Net book
                      valueBacklog
                    
                    $
                    5,124
                    
                    
                    $
                    (5,124
                    )
                    
                    $
                    -Employment
      contracts
                    
                    
                    1,147
                    
                    
                    
                    (1,147
                    )
                    
                    
                    -Customer
      relationships
                    
                    
                    6,961
                    
                    
                    
                    (693
                    )
                    
                    
                    6,268Patent
                    
                    
                    64
                    
                    
                    
                    (64
                    )
                    
                    
                    -Indefinite-lived
      trade name
                    
                    
                    5,680
                    
                    
                    
                    -
                    
                    
                    
                    5,680Total
                    
                    $
                    18,976
                    
                    
                    $
                    (7,028
                    )
                    
                    $
                    11,948





Amortization
expense related to the above intangible assets for the three months ended March
31, 2009 was $718,000. The aggregate amortization expense associated with
intangible assets for the next five years is estimated to be as follows (in
thousands):





2009
      (nine  months
      remaining)
                  
                  $
                  1,0062010
                  
                  
                  1,3422011
                  
                  
                  1,3422012
                  
                  
                  1,3422013
      and thereafter
                  
                  
                  1,236Total
                  
                  $
                  6,268





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 three months ended March 31, 2009.





6. Long-Term Debt





Debt
consists of the following (in thousands):




March 31,
                      2009
                    
                    
                    December 31,
                      200810%
      secured debentures
                    
                    $
                    17,500
                    
                    
                    $
                    20,250Debt
      discount
                    
                    
                    (8,290
                    )
                    
                    
                    (9,639
                    )10%
      secured debentures, net
                    
                    
                    9,210
                    
                    
                    
                    10,611Notes
      payable secured by assets acquired
                    
                    
                    5,913
                    
                    
                    
                    9,500Note
      payable – EIS acquisition
                    
                    
                    1,070
                    
                    
                    
                    1,320Total
      debt
                    
                    
                    16,193
                    
                    
                    
                    21,431Less:
      current maturities
                    
                    
                    (6,345
                    )
                    
                    
                    (11,110
                    )Total
      long-term debt
                    
                    $
                    9,848
                    
                    
                    $
                    10,321


10


10% secured
debentures





In
December 2007, Epic and each purchaser identified on the signature
pages thereto 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, Epic was 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 associated 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 8 for further
discussion of the derivative liability. The debt discount is being amortized to
interest expense over the life of the debentures, which matures on December 1,
2012.  For the three months ended March 31, 2009 and 2008,
approximately $1,389,000 and $653,000, respectively, of debt discount was
amortized to interest expense.





Epic did
not make the December 1, 2008 principal payment and the failure to do this
resulted in an event of default. On February 26, 2009, Epic 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 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, Epic entered into a Debenture Repurchase Agreement (“Repurchase
Agreement”) with the one Holder that did not agree to the Amendment. Under the
provisions of the Repurchase Agreement, Epic repurchased the $250,000
principal amount Debenture 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.


11





Note payable – EIS
acquisition





In
connection with the acquisition of EIS in February 2008, Epic 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 Epic’s payment of the remaining balance
shall be amended to occur 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




The
Company has 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%.
The monthly principal and interest payment of this note is approximately
$72,000.  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.





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 in the amount of $49,336. At March 31,
2009 and December 31, 2008, this note payable had a balance of $4,184,000 and
$4,260,000, respectively and accrued interest of $24,000 and $0
respectively.  At March 31, 2009 and December 31, 2008, the current
portion of this note of $317,000 and $311,000, respectively, and the accrued
interest are included in current liabilities associated with assets held for
sale. At March 31, 2009 and December 31, 2008, the long-term portion of this
note of $3,867,000 and $3,949,000, respectively, are included in 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, CO office.  The 5-year note with a 5% annual interest
rate is due on May 1, 2012, with principal and interest payable monthly in the
amount of $1,887.  At March 31, 2009 and December 31, 2008, this note
payable had a balance of $63,000 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 in the amount of
$27,052. At March 31, 2009 and December 31, 2008, this note payable had a
balance of $387,000 and $460,000, respectively.





The
Company has notes payable with an aggregate principal amount of $1,878,000 to
finance the Company-owned vehicles.  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 of about $56,850. At March 31, 2009 and
December 31, 2008, these notes payable had balances of $1,279,000 and
$1,417,000, respectively.





7.
Stockholders’ Equity





During
the three months ended March 31, 2009, Epic issued 610,321 shares of its
common stock to key employees of Pearl. These shares are related to the
acquisition of Pearl in 2007 and were issued in the three months ended March 31,
2009 as they met the vesting requirements during this period.





During
the three months ended March 31, 2009, 89,000 stock options were
forfeited.





A summary
of stock option activity for the three months ended March 31, 2009 is as
follows:


12





Number
      of
                        Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        PriceOptions
      outstanding, January 1, 2009
                      
                      
                      2,541,500
                      
                      
                      $
                      2.03Options granted
                      
                      
                      -
                      
                      
                      
                      -Options
      exercised
                      
                      
                      -
                      
                      
                      
                      -Options
      expired/forfeited
                      
                      
                      (89,000
                      )
                      
                      $
                      3.30Options
      outstanding, March 31, 2009
                      
                      
                      2,452,500
                      
                      
                      $
                      1.98





8.
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 derivative
liability. As of January 1, 2009, these warrants were no longer deemed to be
indexed to the Company’s own stock.   These warrants had 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 months ended March 31, 2009 of $205,013 is
recorded as a derivative loss in the accompanying consolidated statement of
operations.





9.
Commitments and Contingencies





Litigation




From time
to time, the Company may be involved in litigation or administrative proceedings
relating to claims arising out of its 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 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,
and 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 three months ended March 31, 2008 include the
historical results of EIS from January 1, 2008.





In
February 2009, the Company sold the Kansas and Oklahoma properties, together
with Epic’s future profits interest in the properties of Statesman Resources,
Inc. to a third pary, subject to the Company’s retention of an overriding
royalty interest covering the Kansas property. As part of the transaction, the note payable secured by
the Kansas and Oklahoma properties,
including accrued but unpaid interest totaling $3,993,071 at the acquisition
date, was cancelled by Bear Petroleum,
Inc.The Company recorded a $2,110,066 gain on the sale
of the Kansas and Oklahoma properties in February 2009.  For the three
months ended March 31, 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 the Middle East
and West Africa. .  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.


14





As of
April 30, 2009, the Company’s potential backlog for consulting services to be
performed in the future was approximately $31.8
million. This compares with a combined backlog of approximately $43.5
million as of April 30, 2008. This backlog amount could change by macro economic
market activity and customer demand changes.





Three
Months ended March 31, 2009 compared with Three Months ended March 31,
2008





Revenues
were approximately $9.0 million for the quarter ended March 31, 2009 compared to
approximately $17.5 million for the quarter ended March 31, 2008. The decrease
of $8.5 million was primarily related to revenues from reimbursed
expenses.





Operating
Expenseswere approximately $9.8 million for the quarter ended March 31,
2009 compared to approximately $17.4 million for the quarter ended March 31,
2008 resulting in a decrease of approximately of $7.6 million.  The
$7.6 million decrease was primarily related to reimbursed expenses as it related
to the decrease in revenues from reimbursed expenses.





Income (loss)
from Operationswas approximately ($0.8) million for the quarter ended
March 31, 2009 compared to $0.1 million for the quarter ended March 31,
2008.





Other Expense,
netwas approximately $2.2 million for the quarter ended March 31, 2009
compared to approximately $1.4 million for the quarter ended March 31,
2008.  The increase of $0.8 million was primarily due to higher
interest expense related to debt discount amortization as a result of the
adoption of EITF 07-5.





Income (loss)
from discontinued operations relating to the oil and gas segment, net of
the gain on the sale of the oil and gas properties, was approximately $1.9
million for the three months ended March 31, 2009 compared to approximately
($2,000) for the three months ended March 31, 2008. The increase in Income from
discontinued operations primarily relates to the $2.1 million gain on sale of
the oil and gas properties recognized during the three months ended March 31,
2009.





Net Losswas $1.0 million or $.02 per share for the quarter ended March 31, 2009
compared to $1.3 million or $0.03 per share for the quarter ended March 31, 2008
resulting in a decreased loss of $0.3 million.  The primary reasons
for the decrease in the net loss for the three months ended March 31, 2009 was
the gain on the sale of the oil and gas properties.




Liquidity
and Capital Resources





On
February 26, 2009, Epic 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. Under the Amendment, 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.  On March 13,
2009, Epic entered into a Debenture Repurchase Agreement (“Repurchase
Agreement”) with the one Holder that did not agree to the Amendment. Under
the provisions of the Repurchase Agreement, Epic repurchased the
$250,000 principal amount Debenture for $156,250.





In
February 2009, the Company sold the Kansas and Oklahoma properties, together
with Epic’s future profits interest in the properties of Statesman Resources,
Inc. to a third party, subject to the Company’s retention of an overriding
royalty interest covering the Kansas property. As part of the transaction, the
note payable secured by the Kansas and Oklahoma properties, including accrued
but unpaid interest totaling $3,993,071 at the acquisition date, was cancelled
by Bear Petroleum, Inc. During the three months ended March 31, 2009, the
Company recorded a $2,110,066 gain on the sale of the Kansas and Oklahoma
properties





Operating
activities used cash of approximately $0.4 million for the three months ended
March 31, 2009 compared to approximately $3.6 million of cash provided by
operations for the three months ended March 31, 2008.  We had a net
loss of $1.0 million for the three months ended March 31, 2009 and cash flow
decrease from changes in assets and liabilities of approximately $0.4
million.  In addition during the three months ended March 31, 2009, we
had approximately $1.5 million of amortization of debt discount and debt
issuance costs, $1.1 million of depreciation, amortization and depletion, and
$0.3 million of non-cash stock based compensation expense, which were partially
offset by a $2.1 million gain on sale of oil and gas properties.  For
the three months ended March 31, 2008, we had a net loss of $1.3 million which
was offset by $3.3 million of cash flow increase from changes in assets and
liabilities. In addition during the three months ended March 31, 2008, we had
approximately $0.8 million of amortization of debt discount and debt issuance
costs, $0.5 million of depreciation, amortization and depletion, and $0.3
million of non-cash stock based compensation expense.


15





For the
three months ended March 31, 2009, we had investing activities that used cash of
$41,000 related to acquisition of property and equipment net of proceeds from
sales of property and equipment. For the three months ended March 31, 2008, we
had investing activities that provided cash of approximately $0.7 million
related to a $1.0 million change in restricted cash that was offset by
acquisitions of property and equipment.





For the
three months ended March 31, 2009, we used $3.2 million of cash flows for
financing activities for debt payments.  For the three months ended
March 31, 2008, we used $3.1 million of cash flows for financing activities
primarily due to decrease in bank overdrafts of $2.8 million and $0.3 million
for debt payments.





As of
March 31, 2009, we had a working capital deficit of $7.9 million compared with a
working capital deficit of $10.4 million at December 31, 2008.





Contractual
Commitments





There
have been no material changes to Epic’s contractual commitments during the first
quarter of 2009 (except as noted above).  Please see Note 8 and the
Company’s Annual Report on 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.




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 our Recordable Incidence Rate (“RIR”) as defined by OSHA. For
the three-month period ended March 31, 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.
  (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 Company’s last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


16




PART
II – OTHER INFORMATION




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)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,
    2008.10.6*
                                                              
                                                              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.  17
  Exhibit
                                                                      Number
                                                                    
                                                                    Exhibit Name10.10*
                                                                    
                                                                    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, 2009.31.1
                                                                    
                                                                    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.




18





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:
      May 14, 2009
            /s/John S.
      IppolitoChief
      Executive Officer,President
      and Principal Executive OfficerDate:
      May 14, 2009
            /s/
      Michael KinneyChief  Financial
      Officer, Executive VicePresident and
      PrincipalAccounting
      Officer




19


EXHIBIT INDEX
  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)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,
    2008.10.6*
                                                                    
                                                                    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.  20
  Exhibit
                                                                        Name
                                                                      
                                                                      Exhibit Name10.11
                                                                      
                                                                      Amendment Agreement dated February 26,
      2009
                                                                      
                                                                      Incorporated by reference to Exhibit 10.1 to the
      Company’s Form 8-K filed March 2, 2009.31.1
                                                                      
                                                                      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.
  21