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 September 30, 2009




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


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




EPIC ENERGY RESOURCES,
INC.


(Exact
name of registrant as specified in its charter)





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





1450 Lake Robbins Drive, Suite 160The Woodlands, TX 77380Address of principal executive offices





(281) 419-3742


(Registrant's
telephone number, including area code)




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





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





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





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





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




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







EPIC
ENERGY RESOURCES INC.




Table
of Contents





PagePART
      I — FINANCIAL INFORMATIONItem 1.
      Financial StatementsConsolidated
      Balance Sheets as of September 30, 2009 (unaudited) and December 31,
      2008
                          2Consolidated
      Statements of Operations for the three and nine months ended September 30,
      2009 and 2008 (unaudited)
                          3Consolidated
      Statements of Stockholders’ Equity for the nine months ended September 30,
      2009 (unaudited)
                          4Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2009 and
      2008 (unaudited)
                          5Notes
      to Unaudited Consolidated Financial Statements
                          6Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                          14Item 4T.
      Controls and Procedures
                          17PART
      II — OTHER INFORMATIONItem
      1. Legal Proceedings
                          18Item 6.
      Exhibits
                          18Signatures
                          19Certification
      Pursuant to Section 302Certification
      Pursuant to Section 302Certification
      Pursuant to Section 906


1


PART
1. FINANCIAL INFORMATION
 
 ITEM
1. FINANCIAL STATEMENTS
 
 EPIC
ENERGY RESOURCES INC.
 CONSOLIDATED
BALANCE SHEETS
 (In
thousands, except share data)
 September
      30,
                                              
                                              
                                              December
      31,2009
                                              
                                              
                                              2008(unaudited)ASSETSCurrent
      AssetsCash
      and cash equivalents
                                              
                                              $
                                              479
                                              
                                              
                                              $
                                              4,785Accounts
      receivable:Billed,
      net of allowance of $6,338 and $6,570, respectively
                                              
                                              
                                              10,146
                                              
                                              
                                              
                                              10,690Unbilled
                                              
                                              
                                              1,362
                                              
                                              
                                              
                                              388Prepaid
      expenses and other current assets
                                              
                                              
                                              532
                                              
                                              
                                              
                                              2,027Total
      current assets
                                              
                                              
                                              12,519
                                              
                                              
                                              
                                              17,890Property
      and equipment, net
                                              
                                              
                                              3,704
                                              
                                              
                                              
                                              5,136Assets
      held for sale:Proved
      oil and gas properties (full cost method), net of accumulated depletion
      and impairments of $0 and $9,257, respectively
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,332Other
      mineral reserves
                                              
                                              
                                              -
                                              
                                              
                                              
                                              783Other
      asset held for sale
                                              
                                              
                                              3,395
                                              
                                              
                                              
                                              3,875Other
      assets
                                              
                                              
                                              49
                                              
                                              
                                              
                                              45Debt
      issuance costs, net of accumulated amortization of $807 and $481,
      respectively
                                              
                                              
                                              1,222
                                              
                                              
                                              
                                              1,548Goodwill
                                              
                                              
                                              18,837
                                              
                                              
                                              
                                              18,837Other
      intangible assets, net
                                              
                                              
                                              11,277
                                              
                                              
                                              
                                              12,666Total
      assets
                                              
                                              $
                                              51,003
                                              
                                              
                                              $
                                              62,112LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable
                                              
                                              $
                                              1,426
                                              
                                              
                                              $
                                              5,404Accrued
      liabilities
                                              
                                              
                                              2,977
                                              
                                              
                                              
                                              3,762Deferred
      revenue
                                              
                                              
                                              10,065
                                              
                                              
                                              
                                              2,684Customer
      deposits
                                              
                                              
                                              1,014
                                              
                                              
                                              
                                              4,505Current
      liabilities associated with assets held for sale
                                              
                                              
                                              328
                                              
                                              
                                              
                                              4,383Current
      portion of long-term debt
                                              
                                              
                                              6,404
                                              
                                              
                                              
                                              7,504Total
      current liabilities
                                              
                                              
                                              22,214
                                              
                                              
                                              
                                              28,242Long-term
      liabilities associated with assets held for sale
                                              
                                              
                                              3,707
                                              
                                              
                                              
                                              3,949Long-term
      debt, net
                                              
                                              
                                              4,615
                                              
                                              
                                              
                                              6,372Derivative
      liability
                                              
                                              
                                              1,268
                                              
                                              
                                              
                                              -Deferred
      tax liability
                                              
                                              
                                              1,775
                                              
                                              
                                              
                                              1,775Total
      liabilities
                                              
                                              
                                              33,579
                                              
                                              
                                              
                                              40,338STOCKHOLDERS'
      EQUITYCommon
      stock, no par value: 100,000,000 shares authorized; 44,105,781 and
      43,495,160 shares issued and outstanding, respectively
                                              
                                              
                                              33,639
                                              
                                              
                                              
                                              41,783Additional
      paid-in capital
                                              
                                              
                                              1,786
                                              
                                              
                                              
                                              15,014Accumulated
      deficit
                                              
                                              
                                              (18,001
                                              )
                                              
                                              
                                              (35,023
                                              )Total
      stockholders’ equity
                                              
                                              
                                              17,424
                                              
                                              
                                              
                                              21,774Total
      liabilities and stockholders’ equity
                                              
                                              $
                                              51,003
                                              
                                              
                                              $
                                              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
                                                  September 30,
                                                
                                                
                                                Nine months ended
                                                  September 30,2009
                                                
                                                
                                                2008
                                                
                                                
                                                2009
                                                
                                                
                                                2008REVENUESConsulting
      fees
                                                
                                                $
                                                6,362
                                                
                                                
                                                $
                                                14,176
                                                
                                                
                                                $
                                                21,164
                                                
                                                
                                                $
                                                31,192Reimbursed
      expenses
                                                
                                                
                                                6,990
                                                
                                                
                                                
                                                7,105
                                                
                                                
                                                
                                                11,691
                                                
                                                
                                                
                                                24,164Total
      revenues
                                                
                                                
                                                13,352
                                                
                                                
                                                
                                                21,281
                                                
                                                
                                                
                                                32,855
                                                
                                                
                                                
                                                55,356OPERATING
      EXPENSESReimbursed
      expenses
                                                
                                                
                                                5,325
                                                
                                                
                                                
                                                10,391
                                                
                                                
                                                
                                                8,213
                                                
                                                
                                                
                                                22,092Compensation
      and benefits
                                                
                                                
                                                4,690
                                                
                                                
                                                
                                                5,979
                                                
                                                
                                                
                                                14,700
                                                
                                                
                                                
                                                19,376General
      and administrative
                                                
                                                
                                                884
                                                
                                                
                                                
                                                1,465
                                                
                                                
                                                
                                                2,831
                                                
                                                
                                                
                                                6,730Professional
      and subcontracted services
                                                
                                                
                                                796
                                                
                                                
                                                
                                                1,449
                                                
                                                
                                                
                                                2,975
                                                
                                                
                                                
                                                5,431Occupancy,
      communication and other
                                                
                                                
                                                295
                                                
                                                
                                                
                                                350
                                                
                                                
                                                
                                                916
                                                
                                                
                                                
                                                1,031Depreciation
      and amortization
                                                
                                                
                                                730
                                                
                                                
                                                
                                                1,032
                                                
                                                
                                                
                                                2,591
                                                
                                                
                                                
                                                1,966Impairment
      charges
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                480
                                                
                                                
                                                
                                                -Total
      operating expenses
                                                
                                                
                                                12,720
                                                
                                                
                                                
                                                20,666
                                                
                                                
                                                
                                                32,706
                                                
                                                
                                                
                                                56,626Income
      (loss) from operations
                                                
                                                
                                                632
                                                
                                                
                                                
                                                615
                                                
                                                
                                                
                                                149
                                                
                                                
                                                
                                                (1,270
                                                )OTHER
      INCOME (EXPENSE)Derivative
      gain (loss)
                                                
                                                
                                                2,145
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (481
                                                )
                                                
                                                
                                                -Interest
      expense
                                                
                                                
                                                (1,566
                                                )
                                                
                                                
                                                (1,629
                                                )
                                                
                                                
                                                (5,439
                                                )
                                                
                                                
                                                (4,714
                                                )Interest
      and other income (expense)
                                                
                                                
                                                1
                                                
                                                
                                                
                                                (2,167
                                                )
                                                
                                                
                                                86
                                                
                                                
                                                
                                                (2,110
                                                )Total
      other income (expense), net
                                                
                                                
                                                580
                                                
                                                
                                                
                                                (3,796
                                                )
                                                
                                                
                                                (5,834
                                                )
                                                
                                                
                                                (6,824
                                                )Income
      (loss) from continuing operations before taxes
                                                
                                                
                                                1,212
                                                
                                                
                                                
                                                (3,181
                                                )
                                                
                                                
                                                (5,685
                                                )
                                                
                                                
                                                (8,094
                                                )Income
      tax expense
                                                
                                                
                                                32
                                                
                                                
                                                
                                                11
                                                
                                                
                                                
                                                32
                                                
                                                
                                                
                                                11Income
      (loss) from continuing operations
                                                
                                                
                                                1,180
                                                
                                                
                                                
                                                (3,192
                                                )
                                                
                                                
                                                (5,717
                                                )
                                                
                                                
                                                (8,105
                                                )DISCONTINUED
      OPERATIONSLoss
      from operations of oil and gas segment
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (104
                                                )
                                                
                                                
                                                (162
                                                )
                                                
                                                
                                                (264
                                                )Gain
      on sale of oil and gas properties
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,110
                                                
                                                
                                                
                                                -Income
      (loss) from discontinued operations
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (104
                                                )
                                                
                                                
                                                1,948
                                                
                                                
                                                
                                                (264
                                                )Net income
      (loss)
                                                
                                                $
                                                1,180
                                                
                                                
                                                $
                                                (3,296
                                                )
                                                
                                                $
                                                (3,769
                                                )
                                                
                                                $
                                                (8,369
                                                )Income
      (loss) per common share - basic and diluted:Income
      (loss) from continuing operations
                                                
                                                $
                                                0.03
                                                
                                                
                                                $
                                                (0.07
                                                )
                                                
                                                $
                                                (0.13
                                                )
                                                
                                                $
                                                (0.18
                                                )Income
      (loss) from discontinued operations
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (0.01
                                                )
                                                
                                                
                                                0.04
                                                
                                                
                                                
                                                (0.01
                                                )Net
      income (loss)
                                                
                                                $
                                                0.03
                                                
                                                
                                                $
                                                (0.08
                                                )
                                                
                                                $
                                                (0.09
                                                )
                                                
                                                $
                                                (0.19
                                                )Weighted
      average common shares outstanding - basic and diluted
                                                
                                                
                                                44,105,781
                                                
                                                
                                                
                                                43,041,827
                                                
                                                
                                                
                                                44,063,189
                                                
                                                
                                                
                                                42,993,378
  See
accompanying notes to the unaudited consolidated financial
statements
  3
 
 
 EPIC
ENERGY RESOURCES INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 (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
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      167
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      167Issuance
      of vested shares
                                      
                                      
                                      610,621
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Net
      loss
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3,769
                                      )
                                      
                                      
                                      (3,769
                                      )BALANCE,
      September 30, 2009
                                      
                                      
                                      44,105,781
                                      
                                      
                                      $
                                      33,639
                                      
                                      
                                      $
                                      1,786
                                      
                                      
                                      $
                                      (18,001
                                      )
                                      
                                      $
                                      17,424
  See
accompanying notes to unaudited consolidated financial
statements
  4
 
 EPIC
ENERGY RESOURCES INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
thousands)
 (unaudited)
 Nine Months Ended
                                        September 30,2009
                                      
                                      
                                      2008OPERATING
      ACTIVITIES:Net loss
                                      
                                      $
                                      (3,769
                                      )
                                      
                                      $
                                      (8,369
                                      )Adjustments to reconcile net
      loss to net cash provided by operatingactivities:(Income)
      loss from discontinued operations
                                      
                                      
                                      (1,948
                                      )
                                      
                                      
                                      264Depreciation and
      amortization
                                      
                                      
                                      2,591
                                      
                                      
                                      
                                      1,966Allowance for doubtful
      accounts
                                      
                                      
                                      206
                                      
                                      
                                      
                                      661Amortization of debt discount
      and debt issuance costs
                                      
                                      
                                      3,835
                                      
                                      
                                      
                                      2,624Impairment of asset held for
      sale
                                      
                                      
                                      480
                                      
                                      
                                      
                                      -Stock-based compensation
      expense
                                      
                                      
                                      167
                                      
                                      
                                      
                                      875Loss on sale of property and
      equipment
                                      
                                      
                                      254
                                      
                                      
                                      
                                      486Derivative loss
                                      
                                      
                                      481
                                      
                                      
                                      
                                      -Gain on early extinguishment of
      debt
                                      
                                      
                                      (94
                                      )
                                      
                                      
                                      -Changes in operating assets and
      liabilities:Accounts
    receivable
                                      
                                      
                                      (636
                                      )
                                      
                                      
                                      (7,508
                                      )Prepaid expenses and other
      current assets
                                      
                                      
                                      1,495
                                      
                                      
                                      
                                      28Other non-current
      assets
                                      
                                      
                                      (3
                                      )
                                      
                                      
                                      157Accounts payable
                                      
                                      
                                      (3,978
                                      )
                                      
                                      
                                      7,027Accrued
    liabilities
                                      
                                      
                                      (733
                                      )
                                      
                                      
                                      1,450Customer
deposits
                                      
                                      
                                      (3,491
                                      )
                                      
                                      
                                      1,488Deferred revenue
                                      
                                      
                                      7,381
                                      
                                      
                                      
                                      2,214Net cash provided by operating
      activities
                                      
                                      
                                      2,238
                                      
                                      
                                      
                                      3,363INVESTING
      ACTIVITIES:Increase in restricted
      cash
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,491Purchases of property and
      equipment
                                      
                                      
                                      (205
                                      )
                                      
                                      
                                      (1,352
                                      )Proceeds from sale of property
      and equipment
                                      
                                      
                                      52
                                      
                                      
                                      
                                      -Acquisition of EIS, net of cash
      received
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (232
                                      )Net
      cash provided by (used in) investing activities
                                      
                                      
                                      (153
                                      )
                                      
                                      
                                      907FINANCING
      ACTIVITIES:Bank overdrafts
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3,442
                                      )Payments on debt
                                      
                                      
                                      (6,103
                                      )
                                      
                                      
                                      (825
                                      )Cash
      used in financing activities
                                      
                                      
                                      (6,103
                                      )
                                      
                                      
                                      (4,267
                                      )DISCONTINUED
      OPERATIONS:Net cash used in operating
      activities
                                      
                                      
                                      (63
                                      )
                                      
                                      
                                      -Net cash used in financing
      activities
                                      
                                      
                                      (225
                                      )
                                      
                                      
                                      -Net
      cash used in discontinued operations
                                      
                                      
                                      (288
                                      )
                                      
                                      
                                      -Net
      decrease in cash and cash equivalents
                                      
                                      
                                      (4,306
                                      )
                                      
                                      
                                      3Cash
      and cash equivalents, beginning of period
                                      
                                      
                                      4,785
                                      
                                      
                                      
                                      3,483Cash
      and cash equivalents, end of period
                                      
                                      $
                                      479
                                      
                                      
                                      $
                                      3,486SUPPLEMENTAL
      CASH FLOW DISCLOSURES:Cash
      paid for interest
                                      
                                      $
                                      2,262
                                      
                                      
                                      $
                                      2,115NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Settlement
      of notes payable and accrued interest through sale of oil and gas
      properties
                                      
                                      $
                                      3,993
                                      
                                      
                                      $
                                      -Cumulative
      net effect of change in accounting principle
                                      
                                      $
                                      748
                                      
                                      
                                      $
                                      -Settlement
      of notes payable through sale of property and equipment
                                      
                                      $
                                      128
                                      
                                      
                                      $
                                      -Stock
      issued for EIS acquisition
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      1,050Notes
      payable used to acquire property and equipment
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      488
  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, field and project management services to the oil, gas and energy
industry. Epic also formed a joint venture with a private investor group, Argos
Asset Management, LLC (“Argos”), to support Argos’ investments in
infrastructure, processing and production related projects and to also invest in
similar projects with other third parties. It is expected that the 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 associated processing facilities.
  The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America (“GAAP”), for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and disclosures required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 2009
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2009. The balance sheet at December 31, 2008, has been
derived from the audited financial statements at that date but does not include
all of the information and disclosures required by GAAP for complete financial
statements. For further information, refer to the financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
  2. 
Summary of Accounting Policies
  Principles
of Consolidation
  The
accompanying 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 balance sheet and the three and nine months
ended September 30, 2008 statements of operations have been reclassified to
conform with the three and nine months ended September 30, 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 utilizes various types of financing to fund its business needs,
including debt with warrants attached and other instruments indexed to its
stock. The Company reviews its warrants and conversion features of
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 September 30, 2009, the
Company has 22,685,031 warrants to purchase common stock, the fair values of
which are classified as a liability. Some of these warrants have embedded
conversion features that are treated as a discount on the notes. Such financial
instruments are initially recorded at fair value and amortized to interest
expense over the life of the debt using the effective interest
method.
 .
 Inputs
used in the valuation to derive fair value are classified based on 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 model. Under the Black-Scholes model
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 model  using
an expected life of 3.25 years, volatility of 188% and a risk-free interest rate
of 1.56%, the Company determined the fair value of the warrants to be $1,267,569
at September 30, 2009.
 
 The
following shows the changes in the level three liability measured on a recurring
basis for the nine months ended September 30, 2009:
 
 Beginning
      balance
                      
                      $
                      787,340Total
      derivative loss
                      
                      
                      480,229Ending
      balance
                      
                      $
                      1,267,569
  Earnings
Per Share
 
 Basic
earnings per share (“Basic EPS”) is computed by dividing net income (loss)
attributable to common stock by the weighted average number of common shares
outstanding during each period. Diluted earnings per share (“Diluted EPS”) is
computed by adjusting the average number of common shares outstanding for the
dilutive effect, if any, of common stock equivalents such as stock options and
warrants. Diluted EPS is the same as Basic EPS for all periods presented because
potential common stock equivalents were anti-dilutive. Common stock equivalents
of 25,617,531 and 25,670,131 at September 30, 2009 and 2008, respectively, were
excluded due to their anti-dilutive effect.
  Recent
Accounting Pronouncements
  Recently Adopted Accounting
Pronouncements
 
 On
January 1, 2009, the Company adopted a new accounting standard issued by the
FASB related to the disclosure of derivative instruments and hedging activities.
This standard expanded the disclosure requirements about an entity’s derivative
financial instruments and hedging activities, including qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
instruments. At September 30, 2009, the Company has a derivative liability of
$1,267,569 related to the warrants to purchase common stock.  The
derivative instruments were not entered into as hedging activities, and the
change in value of the liability is included in the accompanying Consolidated
Statement of Operations.
  7
  Effective
January 1, 2009, the Company adopted a new accounting standard related to
determining whether an instrument (or an embedded feature) is indexed to an
entity’s own stock, which would qualify as a scope exception from hedge
accounting. Upon adoption the Company’s outstanding warrants that were
previously classified in equity were reclassified to liabilities as of January
1, 2009, as these warrants contain exercise price reset features and were no
longer deemed to be indexed to the Company’s own stock. See Note 7 for further
discussion.
 
 Effective
June 30, 2009, the Company adopted a new accounting standard issued by the FASB
related to the disclosure requirements of the fair value of financial
instruments. This standard expands the disclosure requirements of fair value
(including the methods and significant assumptions used to estimate fair value)
of certain financial instruments to interim period financial statements that
were previously only required to be disclosed in financial statements for annual
periods. In accordance with this standard, the disclosure requirements have been
applied on a prospective basis and did not have a material impact on the
Company’s consolidated financial statements.
 
 Recently Issued Accounting
Standards
  In August
2009, the FASB issued an amendment to the accounting standards related to the
measurement of liabilities that are recognized or disclosed at fair value on a
recurring basis. This standard clarifies how a company should measure the fair
value of liabilities and that restrictions preventing the transfer of a
liability should not be considered as a factor in the measurement of liabilities
within the scope of this standard. This standard is effective for the Company on
October 1, 2009. The Company does not expect the impact of its adoption to be
material to its consolidated financial statements.
  In
October 2009, the FASB issued an amendment to the accounting standards related
to the accounting for revenue in arrangements with multiple deliverables
including how the arrangement consideration is allocated among delivered and
undelivered items of the arrangement. Among the amendments, this standard
eliminates the use of the residual method for allocating arrangement
consideration and requires an entity to allocate the overall consideration to
each deliverable based on an estimated selling price of each individual
deliverable in the arrangement in the absence of having vendor-specific
objective evidence or other third party evidence of fair value of the
undelivered items. This standard also provides further guidance on how to
determine a separate unit of accounting in a multiple-deliverable revenue
arrangement and expands the disclosure requirements about the judgments made in
applying the estimated selling price method and how those judgments affect the
timing or amount of revenue recognition. This standard, for which the Company is
currently assessing the impact, will become effective for the Company on January
1, 2011.
  In
October 2009, the FASB issued an amendment to the accounting standards related
to certain revenue arrangements that include software elements. This standard
clarifies the existing accounting guidance such that tangible products that
contain both software and non-software components that function together to
deliver the product’s essential functionality, shall be excluded from the scope
of the software revenue recognition accounting standards. Accordingly, sales of
these products may fall within the scope of other revenue recognition accounting
standards or may now be within the scope of this standard and may require an
allocation of the arrangement consideration for each element of the arrangement.
This standard, for which the Company is currently assessing the impact, will
become effective for the Company on January 1, 2011.
  3.
Property and Equipment
 
 Property
and equipment consisted of the following (in thousands):
 
 September
                              30,
      2009
                            
                            
                            December
      31,
                              2008Vehicles
                            
                            $
                            2,070
                            
                            
                            $
                            2,731Computer
      equipment
                            
                            
                            2,565
                            
                            
                            
                            2,521Office
      furniture and equipment
                            
                            
                            950
                            
                            
                            
                            825Leasehold
      improvements
                            
                            
                            575
                            
                            
                            
                            5556,160
                            
                            
                            
                            6,632Less:
      Accumulated depreciation and amortization
                            
                            
                            (2,456
                            )
                            
                            
                            (1,496
                            )Total
      property and equipment, net
                            
                            $
                            3,704
                            
                            
                            $
                            5,136
 
 8
  Depreciation
expense for the three months and nine months ended September 30, 2009 was
$394,881 and $1,203,291, respectively.
 
 In 2008,
the Company adopted a plan to dispose of its airplane. The Company expects that
the final sale and disposal of the assets will be completed by the end of 2009
or early 2010. The carrying value of the airplane that is held for sale is
presented as “Other asset held for sale” in the accompanying Consolidated
Balance Sheets and as such this asset is no longer depreciated. During the nine
months ended September 30, 2009, the Company recognized an impairment on the
airplane of $479,591.
  4.
Oil and Gas Properties
 
 In
February 2009, the Company sold its Kansas property and dissolved its joint
venture associated with its Oklahoma property. The Kansas property was sold to a
third party who assumed the note payable, including accrued but unpaid interest
totaling $3,993,071 at the acquisition date and the future profits interest in
the properties of Statesman Resources, Inc. subject to the Company’s retention
of an overriding royalty interest. During the nine months ended September 30,
2009, the Company recorded a $2,110,066 gain on the sale of the Kansas property,
which is included in discontinued operations in the accompanying Consolidated
Statements of Operations.  The properties and their related assets and
liabilities have been shown separately as assets held for sale and liabilities
associated with assets held for sale on the accompanying Consolidated Balance
Sheets. Assets and liabilities of discontinued operations consisted of the
following at December 31, 2008 (in thousands):
 
 ASSETS:Assets
      held for sale:Proved
      oil and gas properties, net
                        
                        $
                        1,332Other
      mineral reserves
                        
                        
                        783Assets
      of discontinued operations
                        
                        $
                        2,115LIABILITIES:Current
      Liabilities:Accrued interest
                        
                        $
                        547Asset retirement
      obligation
                        
                        
                        230Note
      payable
                        
                        
                        3,295Total
      liabilities of discontinued operations
                        
                        $
                        4,072
 
 5.  Goodwill
and Other Intangible Assets
 
 The
Company’s intangible assets consist of the following at September 30, 2009 (in
thousands):
 
 Carrying
                          amount
                        
                        
                        Accumulated
                          amortization
                        
                        
                        Net
      book
                          valueCustomer
      relationships
                        
                        $
                        6,961
                        
                        
                        $
                        (1,364
                        )
                        
                        $
                        5,597Backlog
                        
                        
                        5,124
                        
                        
                        
                        (5,124
                        )
                        
                        
                        -Employment
      contracts
                        
                        
                        1,147
                        
                        
                        
                        (1,147
                        )
                        
                        
                        -Patent
                        
                        
                        64
                        
                        
                        
                        (64
                        )
                        
                        
                        -Indefinite-lived
      trade name
                        
                        
                        5,680
                        
                        
                        
                        -
                        
                        
                        
                        5,680Total
                        
                        $
                        18,976
                        
                        
                        $
                        (7,699
                        )
                        
                        $
                        11,277
 
 Amortization
expense related to the above intangible assets for the three months and nine
months ended September 30, 2009 was $335,382 and $1,388,406, respectively. The
aggregate amortization expense associated with intangible assets for the next
five years is estimated to be as follows (in thousands):
 
 2009
      (three  months
      remaining)
                      
                      $
                      3352010
                      
                      
                      1,3422011
                      
                      
                      1,3422012
                      
                      
                      1,3422013
      and thereafter
                      
                      
                      1,236Total
                      
                      $
                      5,597
 
 9
  Goodwill
represents the excess of the purchase price of an entity over the fair value of
the net tangible assets. There have been no changes in the carrying amount of
goodwill for the nine months ended September 30, 2009.
 
 6.
Long-Term Debt
 
 Debt
consists of the following (in thousands):
  September
                              30,
      2009
                            
                            
                            December
      31,
                              200810%
      secured debentures
                            
                            $
                            15,000
                            
                            
                            $
                            20,250Debt
      discount
                            
                            
                            (6,170
                            )
                            
                            
                            (9,639
                            )10%
      secured debentures, net
                            
                            
                            8,830
                            
                            
                            
                            10,611Notes
      payable secured by assets acquired
                            
                            
                            5,154
                            
                            
                            
                            9,500Note
      payable – EIS acquisition
                            
                            
                            1,070
                            
                            
                            
                            1,320Total
      debt
                            
                            
                            15,054
                            
                            
                            
                            21,431Less:
      current maturities
                            
                            
                            (6,732
                            )
                            
                            
                            (11,110
                            )Total
      long-term debt
                            
                            $
                            8,322
                            
                            
                            $
                            10,321
 
 10% secured
debentures
 
 In
December 2007, the Company entered into a Purchase Agreement (the “Purchase
Agreement”) for the sale of $20,250,000 of 10% Secured Debentures (the
“Debentures”).  The Debentures are due on December 5, 2012, with
interest payable quarterly on January 1, April 1, July 1 and October 1. The
Debentures are secured by liens on all of the Company’s
assets.  Beginning December 1, 2008, the Company is required to make
quarterly principal payments of $1,265,625.  Any overdue accrued and
unpaid interest shall result in a late fee at an interest rate equal to the
lesser of 18% per annum or the maximum rate permitted by
law.  Prepayment is not allowed without prior written consent of the
holders. The purchasers of the debentures also received warrants which entitle
the holders to purchase up to 15,954,545 shares of the Company’s common stock at
$1.65 per share.  Under the Black-Scholes model using an expected life
of five years, volatility of 72% and a risk-free interest rate of 3.28%, the
Company determined these warrants had a relative fair value of $13,085,380 as of
the date of the transaction.  The relative fair value of the warrants
was originally recorded as additional paid-in capital with a corresponding
amount recorded as a debt discount.  Upon adoption of Topic No. 815,
the debt discount was adjusted and the fair value of the warrants was
reclassified to a derivative liability. The net adjustment to the debt discount
of $39,579 was recorded as a cumulative effect of change in accounting principle
with an offsetting credit to retained earnings. See note 7 for further
discussion of the derivative liability. The debt discount is being amortized to
interest expense, using the effective interest method, over the life of the
debentures, which mature on December 5, 2012.  For the three months
and nine months ended September 30, 2009, approximately $965,195 and $3,508,567,
respectively, of debt discount was amortized to interest expense.
 
 Epic did
not make the December 1, 2008 principal payment when due and this resulted in an
event of default. On February 26, 2009, the Company entered into an Amendment
Agreement (the “Amendment”) with all of the holders of the Debentures (the
“Holders”) except for one holder of a $250,000 Debenture, to amend the Purchase
Agreement and the Debentures. Under the Amendment, the Company paid the amounts
due and the Debenture Holders agreed to waive any Events of Default (as defined
in the Debentures 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
 
 10




In
addition, the Amendment provides that for each three-month period commencing on
January 1, 2010 and ending on each March 31, June 30, September 30 and December
31 thereafter, the Company shall achieve, on a consolidated basis, EBITDA of at
least $1,000,000. The Amendment also provides that until June 30, 2010, the
Company is only permitted to issue up to a maximum aggregate of 10,000,000
shares of common stock (with options and warrants counted as shares) (subject to
adjustment) to employees, consultants, officers, directors and
advisors.  The Company also will not issue any shares of common stock
or options or warrants to employees, consultants, officers, directors or
advisors with a strike price, conversion price, exercise price, or at an
effective purchase price per share, less than $0.50 (subject to adjustment)
until the earlier of (i) such time that the Purchasers no longer hold any
Securities or (ii) one year prior to the expiration date of the Warrants
(regardless of whether any or all Warrants have been exercised). Another
addition to the Purchase Agreement is that it places limitations on increases to
executive compensation beyond the 2008 levels for calendar years 2009 and
2010.  The limitations shall last until the end of calendar year 2010,
or until such time that the Company’s annual EBITDA (as derived from audited
financial statements) exceeds $7,000,000, or the holders of at least 67% in
principal amount of the then outstanding Debentures shall have otherwise given
their prior written consent to terminate the limitations.
 
 The
Amendment also provides that following any and all payments received by the
Company or any subsidiary of the Company in connection with the amounts owed to
the Company by its customer who filed bankruptcy, that were due and payable as
of November 10, 2008, the Company will redeem some or all of the
then-outstanding principal of the Debenture, in an amount equal to the Holders’
pro-rata portion of 50% of such payment.  An additional “Event of
Default” also was added to the Debenture.  It will be an Event of
Default if, upon opening or otherwise maintaining any deposit account or bank
account, the Company does not enter into an account control
agreement  for the benefit of the Holders with respect to the subject
deposit account or bank account.
 
 On March
13, 2009, the Company entered into a Debenture Repurchase Agreement (“Repurchase
agreement”) with a Holder who did not agree to the Amendment. Under the
provisions of the Repurchase agreement the Company repurchased a Debenture with
a principal amount of $250,000 for $156,250. For the nine months ended September
30, 2009, the Company recorded a gain on early extinguishment of debt of $93,750
which is included in interest and other income (expense) in the accompanying
Consolidated Statements of Operations.
 
 Note payable – EIS
acquisition
 
 In
connection with the acquisition of EIS in February 2008, the Company entered
into a $1,400,000 note payable (the “EIS note”) which will be paid to the prior
owners of EIS in periodic installments. On February 20, 2009, the parties to the
EIS note agreed that the schedule for the Company’s payment of the remaining
balance shall be amended as follows: $250,000 on April 1, 2010, $250,000 on July
1, 2010, $250,000 on October 1, 2010, and $320,000 on January 1, 2011
(collectively “Cash Payments”). Each of the Cash Payments will be allocated
among Joseph Allen Wright (“Wright”), Richard Dean Harvey (“R. Harvey”) and
Traci Marlene Harvey (“T. Harvey”) on a percentage basis, with Wright receiving
50%, R. Harvey receiving 25%, and T. Harvey receiving 25% of the Cash
Payments.
  Notes payable secured by
assets acquired
  At
December 31, 2008, the Company had a $2,500,000 note payable secured by the Rush
County Kansas property. The note was for a term of 42 months and bears annual
interest of 10% with principal and interest payable monthly. 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 Sheets. 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. At September 30, 2009 and December 31,
2008, this note payable had a balance of $4,035,000 and $4,260,000, respectively
and no accrued interest.  At September 30, 2009 and December 31, 2008,
the current portion of this note payable is $328,000 and $311,000, respectively,
and is included in current liabilities associated with assets held for sale in
the accompanying Consolidated Balance Sheets. At September 30, 2009 and December
31, 2008, the long-term portion of this note payable is $3,707,000 and
$3,949,000, respectively, and is included in long-term liabilities associated
with assets held for sale in the accompanying Consolidated Balance
Sheets.
 
 The
Company has a $100,000 note payable related to tenant improvements at its
expanded Lakewood, Colorado office.  The 5-year note with a 5% annual
interest rate is due on May 1, 2012, with principal and interest payable
monthly.  At September 30, 2009 and December 31, 2008, this note payable
had a balance of $53,000 and $68,000, respectively.
  11


The
Company has a $872,909 note payable related to its Microsoft ERP system
implementation.  The 3-year note with a 7.25% annual interest rate is due
on June 18, 2010, with principal and interest payable monthly. At September 30,
2009 and December 31, 2008, this note payable had a balance of $236,000 and
$460,000, respectively.





The
Company has various notes payable to finance the Company owned vehicles utilized
for field services. The 3-year notes with annual interest rates of 5.50% are due
April 1, 2011 thru December 1, 2011, with principal and interest payable
monthly. At September 30, 2009 and December 31, 2008, these notes payable had
balances of $831,000 and $1,417,000, respectively.





7.
Derivatives





On
January 1, 2009 the Company adopted Topic No. 815, and as a result 22,685,031
outstanding warrants of the Company containing exercise price reset provisions,
which were previously classified in equity, were reclassified to a derivative
liability as of January 1, 2009 as these warrants were no longer deemed to be
indexed to the Company’s own stock.   These warrants have
exercise prices ranging from $1.50 - $1.65 and expire in December 2012. As of
January 1, 2009, the fair value of these warrants of $787,340 was recognized and
resulted in a cumulative effect adjustment to retained earnings of $20,791,677.
The change in fair value during the three and nine months ended September 30,
2009 of ($2,145,515) and $480,229 is recorded as a derivative (gain) loss in the
accompanying Consolidated Statements of Operations.





8. Stockholders'
Equity





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





9.
Stock Based Compensation





Stock
Options


During
the nine months ended September 30, 2009, 100,000 stock options expired and
472,600 stock options were forfeited.  A summary of stock option
activity for the nine months ended September 30, 2009 is as
follows:





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





Restricted
Stock


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





Non-vested
      restricted stock, December 31, 2008
                      
                      
                      3,600,000Granted
                      
                      
                      -Vested
                      
                      
                      -Forfeited
                      
                      
                      (1,800,000
                      )Non-vested
      restricted stock, September 30, 2009
                      
                      
                      1,800,000





10.
Commitments and Contingencies





Litigation




On June 15, 2009, the Company filed a lawsuit in the
District Court of Montgomery County, Texas against Rex Doyle, Epic’s former
Chief Executive Officer and Director, for employment-related
claims.  Mr. Doyle subsequently filed a counter-claim against the
Company. On June 24, 2009, the Company and Mr. Doyle entered into an agreement
titled Severance and Cooperation Agreement (the “Agreement”), effective July 2,
2009 (the “Effective Date”).  Pursuant to the Agreement, both the
Company and Mr. Doyle agreed to mutual releases of all claims and liabilities
existing as of the Effective Date. TheCompany has $250,000 accrued related to the Agreement
which is included in Accrued liabilities in the accompanying Consolidated
Balance Sheets.


12




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


13





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





This Quarterly Report on Form 10-Q includes
“forward-looking statements” as defined by
the Securities and Exchange Commission, or SEC. We make these forward-looking
statements in reliance on the safe harbor protections provided under the Private
Securities Litigation Reform Act of 1995.  All statements, other than
statements of historical facts, included in this Form 10-Q that address
activities, events or developments that we expect, believe or anticipate will or
may occur in the future are forward-looking statements. 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
forward-looking statements are based on assumptions which we believe are
reasonable based on current expectations and projections about future events and
industry conditions and trends affecting our business. However, whether actual
results and developments will conform to our expectations and predictions is
subject to a number of risks and uncertainties that, among other thingscould cause actual results to differ materially from contained in the
forward-looking statements,  including
without limitation the Risk Factors set forth in our Annual Report on Form 10-K
for the year ended December 31, 2008.





We also may make material acquisitions or divestitures
or enter into financing transactions. None of these events can be predicted with
certainty and the possibility of their occurring is not taken into consideration
in the forward-looking statements.





New factors that could cause actual results to differ
materially from those described in forward-looking statements emerge from time
to time, and it is not possible for us to predict all such factors, or the
extent to which any such factor or combination of factors may cause actual
results to differ from those contained in any forward-looking statement. We
assume no obligation to update publicly any such forward -looking statements,
whether as a result of new information, future events, or
otherwise.





Overview





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





Critical
Accounting Policies





This
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements. The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts. On an ongoing basis, we evaluate our estimates, including
those related to bad debts, intangible assets, long-lived assets, income taxes,
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions and factors that we believe to be reasonable under
the circumstances. Based on our ongoing review, we make adjustments we consider
appropriate under the facts and circumstances. The accompanying 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 nine months ended September 30, 2008 include the
historical results of EIS from January 1, 2008.


14





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





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





As of
September 30, 2009, the Company’s backlog for consulting services to be
performed in the future was approximately $19.8 million. This compares with a
combined backlog of approximately $28.3 million as of September 30, 2008. This
backlog amount could change due to macro-economic market activity and customer
demand changes.





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





Revenues were $13.4 million for the
quarter ended September 30, 2009 compared to $21.3 million for the quarter ended
September 30, 2008. The decrease of $7.9 million was attributable to a $7.8
million decrease in revenues from consulting fees and a $0.1 million decrease in
reimbursed expense revenues.





Operating
Expenseswere $12.7 million for the quarter ended September 30, 2009
compared to $20.7 million for the quarter ended September 30, 2008 resulting in
a decrease of $8.0 million.  The $8.0 million decrease was primarily
related to a $5.1 million decrease in reimbursed expenses and a $1.3 million
decrease in compensation and benefits. Also
contributing to the decrease in operating expenses was a $0.6million
decrease in general and administrative expenses and a $0.7million
decrease in professional and subcontracted services.





Income from
Operationswas $0.6 million for the quarter ended September 30, 2009
compared to $0.6 million for the quarter ended September 30, 2008.





Other Income
(Expense), netwas $0.6 million for the quarter ended September 30, 2009
compared to ($3.8) million for the quarter ended September 30,
2008.  The increase of $4.4 million was primarily due to the gain on
the derivative liability of $2.1 million and the liquidating damages accrual of
$2.2 million included in the three months ended September 30, 2008.





Net Income
(Loss) was $1.2 million or $0.03 per share for the quarter ended
September 30, 2009 compared to ($3.3) million or ($0.08) per share for the
quarter ended September 30, 2008 resulting in an increase of $4.5 million or
$0.11 per share.  The primary reasons for the net income for the three
months ended September 30, 2009 were a decrease in operating expenses and the
derivative gain of $2.1 million recognized during that period.





Nine
Months ended September 30, 2009 compared with Nine Months ended September 30,
2008





Revenues were $32.9 million for the
nine months ended September 30, 2009 compared to $55.4 million for the nine
months ended September 30, 2008. The decrease of $22.5 million was attributable
to a $12.5 million decrease in revenues from reimbursed expenses and a $10.0
million decrease in consulting fees.





Operating
Expenseswere $32.7 million for the nine months ended September 30, 2009
compared to $56.6 million for the nine months ended September 30,
2008.  This decrease of $23.9 million was primarily related to a $4.7
million decrease in compensation and benefits and a $13.9 million decrease in
reimbursed expenses as it relates to the decrease in revenues from reimbursed
expenses. Also contributing to the decrease in
operating expenses was a $3.9million decrease in general and administrative expenses
and a $2.5million decrease in professional and subcontracted
services.





Income (Loss)
from Operationswas $0.1 million for the nine months ended September 30,
2009 compared to a loss of $1.3 million for the nine months ended September 30,
2008. This improvement resulted from the decrease
in operating expenses as compared with the decrease in
revenues.


15





Other Expense,
netwas $5.8 million for the nine months ended September 30, 2009
compared to $6.8 million for the nine months ended September 30,
2008.  The decrease of $1.0 million was primarily due to the
liquidating damages accrual of $2.2 million included in the nine months ended
September 30, 2008 partially offset by an increase in interest expense of $0.7
million and a loss on the derivative liability of $0.5 million.





Net Losswas $3.8 million or $0.09 per share for the nine months ended September
30, 2009 compared to a net loss of $8.4 million or $0.19 per share for the nine
months ended September 30, 2008, resulting in a decreased loss of $4.6 million.
The primary reasons for the net loss for the nine months ended September 30,
2009 were interest expense of $5.4 million and the derivative loss of $0.5
million recognized during that period partially offset by the $2.1 million gain
on the sale of the Kansas oil and gas property.




Liquidity
and Capital Resources





On
February 26, 2009, the Company entered into an Amendment Agreement (the
“Amendment”) with all the holders (the “Holders”) of the Company’s 10% Secured
Debentures except for one holder of a $250,000 Debenture. Under the Amendment,
the Company paid the past due amounts on the Debentures, and the Debenture
Holders agreed to waive any Events of Default (as defined in the Debenture and
other documents executed in connection with the purchase of the Debentures) of
which they had knowledge.  Also, to the extent that a Holder had
requested acceleration of payment of its Debenture, the Holder rescinded such
request and any resulting acceleration of its Debenture.  The Amendment also added requirements for the Company to
achieve specified levels of EBITDA as well as certain restrictions as described
in Note6to the financial statements that are included in this
Form 10-Q.On March 13, 2009, the Company entered into a Debenture
Repurchase Agreement (“Repurchase Agreement”) with a Debenture Holder who did
not agree to the Amendment. Under the provisions of the Repurchase Agreement the
Company repurchased a principal amount of $250,000 for $156,250.





In
February 2009, the Company sold its Kansas property to a third party who assumed
the note payable, including accrued but unpaid interest totaling $3,993,071 at
the acquisition date and future profits interest in the properties of Statesman
Resources, Inc subject to the Company’s retention of an overriding royalty
interest covering the Kansas property. During the nine months ended September
30, 2009, the Company recorded a $2,110,066 gain on the sale of the Kansas
property.





Operating
activities provided cash of $2.2 million for the nine months ended September 30,
2009 compared to approximately $3.4 million for the nine months ended September
30, 2008.  We had a net loss of $3.8 million for the nine months ended
September 30, 2009 which included various non-cash net expenses of $5.9
million.  During the nine months ended September 30, 2009, we had $3.8
million of amortization of debt discount and debt issuance costs, $2.6 million
of depreciation and amortization, $0.5 million impairment on the asset held for
sale and $0.5 million of derivative loss. These non-cash expenses were partially
offset by a non-cash gain on the sale of the oil and gas properties of $2.2
million. For the nine months ended September 30, 2008, we had a net loss of $8.4
million which was offset by changes in assets and liabilities of $4.9 million,
$2.6 million of amortization of debt discount and debt issuance costs, $2.0
million of depreciation and amortization and other $0.9 million of stock based
compensation expense.





For the
nine months ended September 30, 2009, we used $0.1 million of cash flows for
investing activities for the acquisition of property and equipment offset by
proceeds from the sale of property and equipment. For the nine months ended
September 30, 2008, we had investing activities that provided cash of
approximately $0.9 million primarily related to $2.5 million increase in
restricted cash offset by $1.4 million used for the acquisition of property and
equipment.





For the
nine months ended September 30, 2009, we used $6.1 million of cash flows for
financing activities for debt payments.  For the nine months ended
September 30, 2008, we used $4.3 million of cash flows for financing activities
of which $3.4 million was related to a decrease in bank overdrafts and $0.8
million was for debt payments.





As of
September 30, 2009, we had a working capital deficit of $9.7 million compared
with a working capital deficit of $10.4 million at December 31,
2008.





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


16


Contractual
Commitments





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





Except
for the commitments arising from our operating lease 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 Recordable Incidence Rate (“RIR”) as defined by OSHA. For the
nine month period ending September 30, 2009, the Company had no reportable
incidents.  We continued to increase the number of training hours and
worked judiciously to reduce the Company’s RIR’s.




ITEM
4T. CONTROLS AND PROCEDURES





(a)
Disclosure Controls and Procedures




John S.
Ippolito,our
President and Chief Executive Officer and Michael Kinney, our Chief Financial
Officer, under the supervision and with the
participation of management, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15e of the
Securities Exchange Act of 1934 (the “Exchange Act”)), as of the end of the
period covered by this Quarterly Report on Form
10-Q. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource constraints and that
management is required to apply its judgment in evaluating the benefits of
possible controls and procedures relative to their costs. Based upon their
evaluation, Messr. Ippolito and Kinney have concluded that our disclosure controls and procedures are effective to ensure that
information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms
as of September 30, 2009.




(b)
Changes in Internal Control over Financial Reporting




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


17




PART
II – OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS





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





ITEM
6. EXHIBITS





Exhibit Number
                
                Exhibit Name3.1
                
                Articles
      of Incorporation
                
                Incorporated
      by reference, and as same exhibit number, from the Company’s Registration
      Statement on Form 10-SB filed on August 22, 2000 (Commission File No.
      000-31357).3.2
                
                Amendments
      to Articles of Incorporation
                
                Incorporated
      by reference, and as same exhibit number, from the Company's Registration
      Statement on Form SB-2 filed on January 4, 2008 (Commission File No.
      333-148479).3.3
                
                Bylaws
                
                Incorporated
      by reference, and as same  exhibit number, from the Company's
      Registration Statement on Form  SB-2 filed on January 4, 2008
      (Commission File No. 333-148479).3.4
                
                Amendment
      to Article III, Section 5 of the Bylaws
                
                Incorporated
      by reference to Exhibit 3.1 to the Company’s report on Form 8-K dated June
      30, 2009.31.1
                
                Certification
      of Chief Executive Officer (Principal Executive Officer) pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
                
                Filed
      herein.31.2
                
                Certification
      of Chief Financial Officer (Principal Accounting Officer) pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
                
                Filed
      herein.32
                
                Certification
      of Chief Executive Officer (Principal Executive Officer and Chief
      Financial Officer (Principal Accounting Officer) pursuant to 18 U.S.C.
      Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
                
                Filed
      herein.


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:
      November     , 2009
              /s/ John S. IppolitoChief
      Executive Officer, President and Principal
                Executive  OfficerDate:
      November     , 2009
              /s/ Michael KinneyChief  Financial
      Officer, Executive Vice
                President
      and Principal Accounting
Officer


19