As filed with the Securities and Exchange Commission on ______, 2008
Commission File No. 333-148479
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1/A
Amendment No. 1
Registration Statement Under
THE SECURITIES ACT OF 1933
EPIC ENERGY RESOURCES, INC.
------ ----------------------------
(Exact name of registrant as specified in charter)
Colorado 1311 94-3363969
- ---------------------------- ------------------------- ---------------------
(State or other jurisdiction (Primary Standard Classi- (IRS Employer
of incorporation) fication Code Number) I.D. Number)
10655 Six Pines, Suite 210
The Woodlands, TX 77380
(281) 419-3742
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(Address and telephone number of principal executive offices)
10655 Six Pines, Suite 210
The Woodlands, TX 77380
(281) 419-3742
-------------------------------------
(Address of principal place of business or intended principal place of business)
Rex P. Doyle
10655 Six Pines, Suite 210
The Woodlands, TX 77380
(281) 419-3742
------------------------------------
(Name, address and telephone number of agent for service)
Copies of all communications, including all communications sent
to the agent for service, should be sent to:
William T. Hart, Esq.
Hart & Trinen, LLP
1624 Washington Street
Denver, Colorado 80203
303-839-0061
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box [X].
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
Class of Maximum Maximum
Securities Securities Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Share (1) Price Fee
- ---------- ---------- ----------- ---------- ------------
Common Stock (2) 34,314,674 $1.10 $37,746,142 $1,484
- -----------------------------------------------------------------------------
(1) Offering price computed in accordance with Rule 457 (c). (2) Shares of
common stock offered by selling shareholders
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of l933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
EPIC ENERGY RESOURCES, INC.
Common Stock
By means of this prospectus a number of shareholders of Epic Energy
Resources, Inc. are offering to sell 5,429,335 shares of Epic's common stock, as
well as up to 22,685,339 shares of common stock issuable upon the exercise of
warrants. The actual number of shares issuable upon the exercise of the warrants
may increase as the result of future sales of Epic's common stock at prices
below the warrant exercise price.
By means of this prospectus holders of promissory notes sold by Epic may also
sell up to 6,200,000 shares of common stock which Epic, at its option, may issue
to the holders of the notes as payment of principal. The actual number of shares
which may be issued as payment of principal will depend upon the amount, if any,
which Epic elects to pay with shares of its common stock and the future market
price of Epic's common stock.
See "Description of Securities" for information concerning the terms of the
notes and the warrants. The persons which, by means of this prospectus, are
offering Epic's shares are sometimes referred to as the selling shareholders.
The selling shareholders may be considered "underwriters" as that term is
defined in the Securities Act of 1933.
The shares offered by the selling shareholders may be sold in the
over-the-counter market at prevailing market prices and terms then prevailing or
in negotiated transactions.
Epic's common stock is quoted on the OTC Bulletin Board under the symbol
"EPCC." On February 29, 2008 the closing price for one share of the Epic's
common stock was $1.07.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
These securities are speculative and involve a high degree of risk. For a
description of certain important factors that should be considered by
prospective investors, see "Risk Factors" beginning on page 3 of this
Prospectus.
The date of this prospectus is ____________ 2008
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The following information is qualified in its entirety by the detailed
information appearing elsewhere in this prospectus.
Epic was incorporated in Colorado on June 6, 1989. Following its
formation Epic was inactive until April 2006, when Epic changed management and
began operating in the oil and gas industry.
In August 2007 Epic acquired The Carnrite Group, LLC for 3,177,812 shares
of its common stock.
In December 2007 Epic acquired Pearl Investment Company (formerly named
Pearl Development Company) for 1,486,240 shares of its common stock and cash of
$18,720,000.
In February 2008, Epic acquired Epic Integrated Solutions, LLC, an
unaffiliated entity, for cash and 1,000,000 shares of its restricted common
stock. At closing, Epic paid $600,000 and issued 1,000,000 shares of its common
stock to three owners of Epic Integrated. An additional $1,700,000 will be paid
to the three owners in periodic installments during 2008 and 2009.
The Carnrite Group, Pearl Investment Company and Epic Integrated provide
consulting services to the oil, gas and energy industry in the areas of
engineering, construction management, operations, maintenance, oilfield project
management training, operations documentation and data managment.
As of the date of this prospectus Epic's revenues from the sale of oil
and gas were not significant.
Epic's officers are located at 10655 Six Pines, Suite 210, The Woodlands,
TX 77380 and its telephone number is (281) 419-3742 and its fax number is (281)
419-1114.
Epic's website is: www.1epic.com.
The Offering
On December 5, 2007 Epic sold 4,406,334 shares of its common stock to a
group of private investors for gross proceeds of $6,609,500, or $1.50 per share.
The investors also received warrants which entitle the holders to purchase up to
4,406,334 shares of Epic's common stock. The warrants are exercisable at a price
of $1.50 per share and expire on December 5, 2012.
On December 31, 2007 Epic sold an additional 1,023,001 shares of its
common stock to a group of private investors for gross proceeds of $1,534,502 or
$1.50 per share. The investors also received warrants which entitle the holders
to purchase up to 1,023,001 shares of Epic's common stock. The warrants are
exercisable at a price of $1.50 per share and expire on December 5, 2012.
On December 5, 2007 Epic also sold notes in the principal amount of
$20,250,000 to a second group of private investors. The notes bear interest
annually at 10% per year. The notes are due and payable on December 5, 2012 and
are secured by liens on all of Epic's assets. The purchasers of the notes also
4
received warrants which entitle the holders to purchase up to 15,954,853 shares
of Epic's common stock. The warrants are exercisable at a price of $1.65 per
share and expire on December 5, 2012.
Rodman & Renshaw acted as the lead placement agent for the sale of the
common stock, notes and warrants. For its services in this regard, Rodman &
Renshaw received $1,849,000 in cash from Epic, as well as warrants to purchase
1,301,151 shares of Epic's common stock.
Epic may also issue shares of its common stock to the holders of the notes
as payment of principal.
By means of this prospectus investors are offering to sell shares of
Epic's common stock sold in the December 2007 financing as well shares which may
be issued in payment of the notes or upon the exercise of the warrants. See
"Description of Securities" for information concerning the terms of the notes
and the warrants.
Epic will not receive any proceeds from the sale of the shares by the
selling shareholders. Although Epic will receive proceeds from the exercise of
any warrants, Epic has not determined how the proceeds will be used.
As of February 29, 2008, Epic had 43,948,921 outstanding shares of common
stock. The number of outstanding shares does not give effect to shares which may
be issued as payment of principal on the notes sold in December 2007 or the
exercise of outstanding warrants or options. See "Comparative Share Data".
The purchase of the securities offered by this prospectus involves a high
degree of risk. Risk factors include the potential for a decrease in revenues if
the price of oil or gas should decline and the limited market for Epic's common
stock. See the "Risk Factors" section of this prospectus for additional Risk
Factors.
Forward Looking Statements
This prospectus contains various forward-looking statements that are based
on Epic's beliefs as well as assumptions made by and information currently
available to Epic. When used in this prospectus, the words "believe", "expect",
"anticipate", "estimate" and similar expressions are intended to identify
forward-looking statements. Such statements may include statements regarding
seeking business opportunities, payment of operating expenses, and the like, and
are subject to certain risks, uncertainties and assumptions which could cause
actual results to differ materially from projections or estimates. Factors which
could cause actual results to differ materially are discussed at length under
the heading "Risk Factors". Should one or more of the enumerated risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. Investors should not place undue reliance on forward-looking
statements, all of which speak only as of the date made.
RISK FACTORS
The securities being offered involve a degree of risk. Prospective
investors should consider the following risk factors which affect Epic's
business and this offering. If any of the risks discussed below materialize,
5
Epic's common stock could decline in value or become worthless.
Energy Consulting Services
Epic's limited operating history may make it difficult for investors to assess
Epic's future operating results. Epic was incorporated in 1989 but was inactive
until April 2006 when it began operations in the energy consulting and oil and
gas industries. Due to Epic's limited operating history, an investor's
assessment of Epic's future performance may prove to be inaccurate.
A decline in the price of, or demand for, oil or gas could reduce Epic's
revenues. The demand for Epic's services depends on trends in oil and natural
gas prices and is particularly sensitive to the level of exploration,
development, and production by oil and natural gas companies. Historically, the
prices for oil and gas have been volatile and are likely to continue to be
volatile. Spending on exploration and production activities will have a
significant impact on the activity level of Epic's consulting businesses.
The loss of key management and technical personnel could harm Epic's business
Epic depends greatly on the efforts of its executive officers and other key
employees. The loss or unavailability of any of Epic's executive officers or
other key employees could have a material adverse effect on its business. Many
of the services that Epic provides are complex and highly engineered. Epic
believes that its success will depend upon its ability to employ and retain
skilled technical personnel. The demand for skilled workers is high, the supply
is limited and Epic's inability to recruit and retain the workers it needs will
hurt its business.
Competition for customers and personnel in the energy consulting business may
reduce Epic's revenues. The energy consulting industry is highly competitive,
with limited barriers to entry. Large full-service and specialized companies, as
well as small local operations, compete with Epic. Competition in some markets
is intense, particularly with regard to recruiting personnel, and these
competitive forces may limit Epic's ability to raise prices to its customers.
The loss of one or more significant customers of Pearl Investment Company could
result in a substantial decline in Epic's consolidated revenues. During the year
ended December 31, 2006 two customers accounted for 78% of the total revenues of
Pearl Investment Company. During the year ended December 31, 2005 four customers
accounted for 82% of Pearl Investment Company's total revenues. The loss of any
significant customer of Pearl Investment Company could have a material adverse
impact on the operating results of Pearl Investment Company and the consolidated
operating results of Epic.
Epic has significant working capital requirements. Epic needs significant
working capital in order to operate its business. Epic must maintain cash
reserves to pay its employees and consultants prior to receiving payment from
customers. These working capital requirements may increase in future periods. If
Epic's cash balances cannot satisfy its working capital requirements, Epic could
be required to explore alternative sources of financing to satisfy its needs,
including the sale of equity or debt securities which would result in dilution
to existing shareholders.
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If Epic's expansion efforts are not successful, its operations will be adversely
affected. Epic recently acquired two energy consulting firms and Epic may
continue to pursue new acquisitions in the future. However, unsuccessful
acquisitions may result in significant additional expenses that would not
otherwise be incurred. Epic may not be able to integrate the operations of these
two consulting firms without unanticipated costs and difficulties and retain its
customers and key employees. In addition, Epic may not realize the revenues that
it expected from these acquisitions.
Epic may suffer losses from its fixed price contracts. Some of Epic's consulting
agreements are either on a cost-reimbursable basis or on a fixed-price basis.
The failure to estimate accurately the resources and time required for a
fixed-price project or the failure to complete contractual obligations within
the time frame and costs committed could have a material adverse effect on
Epic's business. In connection with projects covered by fixed-price contracts,
Epic bears the risk of cost over-runs, inflation, labor availability and
productivity, and supplier and subcontractor pricing and performance.
Third parties Epic may use may not provide services in an adequate or timely
manner. Epic may sometimes use third-party subcontractors and equipment
manufacturers to assist Epic with a project. To the extent Epic cannot engage
subcontractors or acquire equipment or materials, its ability to complete a
project in a timely fashion or at a profit may be impaired. If the amount Epic
is required to pay for goods and services exceeds the amount Epic estimated in
bidding for fixed-price work, Epic could experience losses. Any delay or failure
by subcontractors to complete their portion of a project, may cause Epic to
incur additional costs, including compensating the customer for delays. In
addition, if a subcontractor or a manufacturer is unable to deliver services,
equipment, or materials according to agreed upon terms for any reason, Epic may
be required to purchase the services, equipment, or materials from another
source at a higher price. This may reduce Epic's profit or result in a loss on a
project.
Doing business in foreign countries subjects Epic to economic and political
conditions which differ from those in the United States and which could result
in losses. A significant portion of Epic's consulting revenue is derived from
operations outside of the United States, which exposes Epic to risks inherent in
doing business in each of the countries in which it transacts business. The
occurrence of any of the risks described below could have a material adverse
effect on Epic's operations.
o political and economic instability;
o civil unrest, acts of terrorism, force majeure, war, or other armed
conflict;
o currency fluctuations, devaluations, and conversion restrictions;
o confiscatory taxation or other adverse tax policies;
o government activities that limit or disrupt markets, restrict payments
or result in the deprivation of contract rights.
Fluctuations in foreign exchange rates and changes in foreign exchange controls
could reduce Epic's revenues and restrict the use of its revenue. A sizable
portion of Epic's revenue is in foreign currencies. As a result, Epic is subject
to exchange risks resulting from changes in foreign exchange rates, the
implementation of exchange controls, and potential limitations on Epic's ability
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to transfer earnings from operations in one country to fund operations in other
countries.
Epic could face substantial liability due to claims from customers or third
parties. Through its subsidiaries, Epic provides advice to oil, gas and energy
companies in a variety of areas, including well drilling and completion, project
design and construction management. The services provided by Epic expose it to
potential professional liability, general and third-party liability, warranty,
and other claims which may be in excess of its insurance limits.
Epic's intellectual property may become obsolete and may not be protected from
competitors. Epic relies on intellectual property rights to provide consulting
services. Epic may not be able to successfully preserve these intellectual
property rights in the future, and these rights could be invalidated,
circumvented, or challenged. In addition, the laws of some foreign countries in
which Epic provides services do not protect intellectual property rights to the
same extent as the laws of the United States. Epic's failure to protect its
proprietary information and any successful intellectual property challenges or
infringement proceedings against Epic could adversely affect its competitive
position.
The market for Epic's services is characterized by continual
technological developments. If Epic is not able to provide commercially
competitive services in a timely manner in response to changes in technology,
its business could be adversely affected and the value of its intellectual
property may be reduced. Likewise, if Epic's proprietary technologies or work
processes become obsolete, it may no longer be competitive and its business
could be adversely affected.
Oil and Gas Exploration and Development
If Epic cannot obtain additional capital, Epic may have to delay or postpone
exploration and development and activities. Epic needs additional capital to
find oil and gas reserves. Epic may be unable to obtain the funding which it
requires.
Oil and gas exploration and development is not an exact science, and involves a
high degree of risk. The primary risk lies in the drilling of dry holes or
drilling and completing wells which, though productive, do not produce gas
and/or oil in sufficient amounts to return the amounts expended and produce a
profit. Hazards, such as unusual or unexpected formation pressures, downhole
fires, blowouts, loss of circulation of drilling fluids and other conditions are
involved in drilling and completing oil and gas wells and, if such hazards are
encountered, completion of any well may be substantially delayed or prevented.
In addition, adverse weather conditions can hinder or delay operations, as can
shortages of equipment and materials or unavailability of drilling, completion,
and/or work-over rigs. Even though a well is completed and is found to be
productive, water and/or other substances may be encountered in the well, which
may impair or prevent production or marketing of oil or gas from the well.
Exploratory drilling involves substantially greater economic risks than
development drilling because the percentage of wells completed as producing
wells is usually less than in development drilling. Exploratory drilling itself
can be of varying degrees of risk and can generally be divided into higher risk
attempts to discover a reservoir in a completely unproven area or relatively
lower risk efforts in areas not too distant from existing reservoirs. While
exploration adjacent to or near existing reservoirs may be more likely to result
8
in the discovery of oil and gas than in completely unproven areas, exploratory
efforts are nevertheless high risk activities.
Although the completion of oil and gas wells is, to a certain extent, less
risky than drilling for oil and gas, the process of completing an oil or gas
well is nevertheless associated with considerable risks. In addition, even if a
well is completed as a producer, the well for a variety of reasons may not
produce sufficient oil or gas in order to repay Epic's investment in the well.
Epic's operations will be affected from time to time and in varying degrees by
the price for oil or gas. The price of oil and gas is often volatile and
influenced by political developments and Federal and state laws and regulations
regarding the development, production and sale of crude oil and natural gas.
These regulations require permits for drilling of wells and also cover the
spacing of wells, the prevention of waste, and other matters. Rates of
production of oil and gas have for many years been subject to Federal and state
conservation laws and regulations and the petroleum industry is subject to
Federal tax laws. In addition, the production of oil or gas may be interrupted
or terminated by governmental authorities due to ecological and other
considerations. Compliance with these regulations may require a significant
capital commitment by and expense to Epic and may delay or otherwise adversely
affect Epic's proposed operations.
Risks Related to this Offering
- ------------------------------
There is, at present, only a limited market for Epic's common stock. Epic's
common stock is quoted on the OTC Bulletin Board and is thinly traded. The OTC
Bulletin Board is an inter-dealer, over-the-counter market that provides
significantly less liquidity than other public trading markets, such as the
NASDAQ stock market. Quotations for stocks included on the OTC Bulletin Board
may not be listed in the financial sections of newspapers and prices for
securities traded on the OTC Bulletin Board are often volatile.
Shares issuable for the payment of principal on the notes or the exercise of
outstanding options and warrants may substantially increase the number of shares
available for sale in the public market and may depress the price of Epic's
common stock. Epic had outstanding options and warrants which, as of February
29, 2008, allow the holders to acquire up to approximately 24,407,000 additional
shares of its common stock. Until the options and warrants expire, the holders
will have an opportunity to profit from any increase in the market price of
Epic's common stock without assuming the risks of ownership. Holders of options
and warrants may exercise these securities at a time when Epic could obtain
additional capital on terms more favorable than those provided by the options or
warrants. The exercise of the options and warrants will dilute the voting
interest of the owners of presently outstanding shares by adding a substantial
number of additional shares of Epic's common stock.
Epic has filed a registration statement with the Securities and Exchange
Commission so that the shares of common stock sold in the December 2007
financing as well shares which may be issued in payment of the notes or upon the
exercise of the warrants may be sold in the public market. The sale of common
stock issued or issuable upon the exercise of the warrants, or the perception
that such sales could occur, may adversely affect the market price of Epic's
common stock.
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COMPARATIVE SHARE DATA
Number of Note
Shares Reference
--------- ---------
Shares outstanding as of February 29, 2008: 43,948,921
Shares to be sold in this offering:
Shares of common stock 5,429,335 A
Shares issuable upon exercise of warrants 21,384,188 A
Shares issuable as payment of principal on notes 6,200,000 A
Shares issuable upon exercise of warrants issued
to placement agent 1,301,151 B
Other Shares Which May Be Issued:
- ---------------------------------
The following table lists additional shares of Epic's common stock which
may be issued as of February 29, 2008:
Number of Note
Shares Reference
--------- ---------
Shares issuable upon the exercise of warrants
held by private investors 1,455,100 C
Shares issuable upon exercise of options granted
to Epic's officers, employees and directors 1,611,000 D
Shares to be issued to officers and employees
of Pearl Investment Company 3,313,760 E
A. On December 5, 2007 Epic sold 4,406,334 shares of its common stock to a group
of private investors for gross proceeds of $6,609,500, or $1.50 per share. The
investors also received warrants which entitle the holders to purchase up to
4,406,334 shares of Epic's common stock. The warrants are exercisable at a price
of $1.50 per share and expire on December 5, 2012.
On December 31, 2007 Epic sold an additional 1,023,001 shares of its
common stock to a group of private investors for gross proceeds of $1,534,502 or
$1.50 per share. The investors also received warrants which entitle the holders
to purchase up to 1,023,001 shares of Epic's common stock. The warrants are
exercisable at a price of $1.50 per share and expire on December 5, 2012.
On December 5, 2007 Epic also sold notes in the principal amount of
$20,250,000 to a second group of private investors. The purchasers of the notes
also received warrants which entitle the holders to purchase up to 15,954,853
shares of Epic's common stock. The warrants are exercisable at a price of $1.65
per share and expire on December 5, 2012.
10
The actual number of shares issuable upon the exercise of the warrants may
increase as the result of future sales of Epic's common stock at prices below
the warrant exercise price.
At Epic's election, and under certain conditions, Epic may use shares of
its common stock to make principal payments on the notes. The number in the
table is an estimate and assumes that Epic makes all principal payment with
shares of its common stock having a price of $3.30 per share. The actual number
of shares which may be issued as payment of principal will depend on the amount,
if any which Epic elects to pay with shares of its common stock and the future
market price of Epic's common stock.
See "Description of Securities" for more detailed information concerning
the notes and warrants.
B. Rodman & Renshaw served as the lead placement agent in connection with the
private placement of the securities described in Note A and received a cash fee
of $1,849,000 as well as warrants to purchase 1,301,151 shares of Epic's common
stock. Warrants to purchase 184,333 shares are exercisable at a price of $1.50
per share and warrants to purchase 1,116,818 shares are exercisable at a price
of $1.65 per share.
C. Between October 2006 and April 2007 Epic raised $ 1,414,700, net of
commissions, from the sale of 1,455,100 shares of its common stock, plus 491,500
Series A warrants and 963,600 Series B warrants, to private investors. The
Series A warrants expired on December 31, 2007. Each Series B Warrant entitles
the holder to purchase one share of Epic's common stock at a price of $2.50 per
share at any time prior to September 30, 2009.
D. See "Management - Executive Compensation" for information concerning the
terms of these options.
E. On December 5, 2007, Epic acquired Pearl Investment Company for 1,486,240
shares of its common stock and cash of $18,720,000. It is expected that up to
3,313,760 additional shares may be issued in the future to key employees and
officers of Pearl Investment Company subject to certain vesting requirements.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Epic was incorporated in Colorado on June 6, 1989. Following its
formation Epic was inactive until April 2006, when Epic changed management and
began operating in the oil and gas industry.
In August 2007 Epic acquired the Carnrite Group, LLC for 3,177,812 shares
of its common stock.
In December 2007 Epic acquired Pearl Investment Company (formerly named
Pearl Development Company) for 1,486,240 shares of its common stock and
$18,720,000 in cash.
On February 20, 2008, Epic acquired Epic Integrated Solutions, LLC, an
unaffiliated entity, for cash and 1,000,000 shares of its restricted common
stock. At closing, Epic paid $600,000 and issued 1,000,000 shares of its common
stock to the three owners of Epic Integrated. An additional $1,700,000 will be
11
paid to the three owners in periodic installments during 2008 and 2009.
The Carnrite Group, Pearl Investment Company and Epic Integrated provide
consulting services to the oil, gas and energy industry in the areas of
engineering, construction management, operations, maintenance, oil field project
management, training, operations documentation and data management.
Epic has a 100% working interest in 58 shut in gas wells and a 50%
working interest in seven shut in gas wells.
Results of Operations
- ---------------------
Epic
- ----
Following its formation in 1989 Epic was relatively inactive until April
2006, when its management changed and it became involved in providing consulting
services and oil and gas exploration and development.
Year Ended December 31, 2006
- ----------------------------
During the year ended December 3, 2005 Epic did not generate any revenue
and had a loss of $(20,000).
During the year ended December 31, 2006 Epic had gross revenues of $106,263
which were derived from the sale of natural gas and consulting services. During
2006 Epic's operating expenses increased as Epic hired full time management and
staff and as a result of a write-down of Epic's oil and gas properties to their
estimate value.
Nine Months Ended September 30, 2007
- ------------------------------------
During the nine months ended September 30, 2006 Epic was inactive until
April 2006. Following a change in management in April 2006, Epic hired full time
management and staff.
During the nine months ended September 30, 2007 Epic had minimal revenues
were from the sale of gas from its wells in Kansas and Oklahoma. In August 2007
Epic acquired The Carnrite Group, LLC, a company which provides energy
consulting services. The increase in Epic's revenues during the nine months
ended September 30, 2007 was the direct result of the consolidation of
Carnrite's operations subsequent to August 13, 2007, the date of the
acquisition.
Expenses which are directly related to oil and gas production are charged
to lease operating expenses. All other expenses (except depletion, accretion and
impairment), whether they relate to consulting services or oil and gas
exploration/development, are recorded as general and administrative expenses.
During the nine months ended September 30, 2007 Epic's operating expenses
increased as the result of the acquisition of Carnrite and a write-down of the
Epic's oil and gas properties to their estimate value.
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The Carnrite Group
- ------------------
The Carnrite Group was formed on March 28, 2007. As a result, comparison
to prior periods is not possible.
Pearl Investment Company
- ------------------------
Year Ended December 31, 2006
- ----------------------------
Revenues were $34,610,756 for the year ended December 31, 2006 as
compared to 12,274,683 for the year ended December 31, 2005, an increase of
$22,336,073 or 182.0%. Revenues increased due to a general increase in
engineering, construction operations and maintenance consulting contracts and an
increase in contracts which required Pearl to purchase materials used by clients
in construction contracts. The cost of the materials was billed to the clients.
Cost of services were $25,894,816 for the year ended December 31, 2006 as
compared to $9,840,115 for the year ended December 31, 2005, an increase of
$16,054,701 or 163.2%. Gross Profit was $8,715,940 or 25.2% of sales for the
year ended December 31, 2006 as compared to $2,434,568 or 19.8% of sales for the
year ended December 31, 2005. The increase in Pearl's gross profit percentage
was the result of more efficient use of personnel and a reduction in costs which
could not be billed to clients. General and Administrative Expenses were
$4,317,806 for the year ended December 31, 2006 as compared to $1,651,705 for
the year ended December 31, 2005, an increase of $2,666,101 or 161.4%. General
and administrative expenses, as a percentage of total sales, were 12.5% in 2006,
which was comparable to 13.5% in 2005.
Nine Months Ended September 30, 2007
- ------------------------------------
Revenues were $37,575,940 for the nine months ended September 30, 2007 as
compared to 23,200,162 for the nine months ended September 30, 2006, an increase
of $14,375,778 or 62.0%. Revenues increased due to a general increase in
consulting contracts and an increase in contracts which required Pearl to
purchase materials used by clients in construction projects. The cost of the
materials was billed to the clients.
Cost of Services were $28,667,745 for the nine months ended September 30,
2007 as compared to $16,888,212 for the nine months ended September 30, 2006, an
increase of $11,779,553 or 69.8%. Gross Profit was $8,908,195 or 23.7 % of sales
for the nine months ended September 30, 2007 as compared to $6,311,949 or 27.2%
of sales for the nine months ended September 30, 2006. The decrease in Pearl's
gross profit percentage was the result of higher salaries and employee benefit
expense.
General and Administrative Expenses were $5,888,626 for the nine months
ended September 30, 2007 as compared to $2,334,665 for the nine months ended
September 30, 2006, an increase of $3,553,961 or 152.2%. General and
administrative expenses, as a percentage of total sales, were 16% in 2007,
compared to 10% in 2006. General and administrative expenses increased primarily
as a result of the following:
o Marketing, promotion and communication expenses increased as Pearl
made a greater effort to expose its services to the oil and gas
community;
13
o Office expenses increased as the result of the expansion of Pearl's
main office in Colorado and the addition of branch offices;
o Depreciation and amortization expense increased due to the purchase of
an airplane at the end of 2006;
o Professional fees increased due to the costs associated with the sale
of Pearl to Epic and the audit of Pearl's financial statements;
o Aviation expense increased as a result of the purchase of an airplane
at the end of 2006.
Liquidity and Capital Resources
- -------------------------------
Between October 2006 and April 2007 Epic raised $1,414,700, net
commissions, from the sale of 1,455,100 shares of its common stock, plus 491,500
Series A warrants and 963,600 Series B warrants, to private investors. The
Series A warrants expired on December 31, 2007. Each Series B Warrant entitles
the holder to purchase one share of Epic's common stock at a price of $2.50 per
share at any time prior to September 30, 2009.
On December 5, 2007 Epic sold 4,406,334 shares of its common stock to a
group of private investors for gross proceeds of $6,609,500, or $1.50 per share.
The investors also received warrants which entitle the holders to purchase up to
4,406,334 shares of the Company's common stock. The warrants are exercisable at
a price of $1.50 per share and expire on December 5, 2012.
On December 31, 2007 Epic sold an additional 1,023,001 shares of its
common stock to a group of private investors for gross proceeds of $1,534,502 or
$1.50 per share. The investors also received warrants which entitle the holders
to purchase up to 1,023,001 shares of Epic's common stock. The warrants are
exercisable at a price of $1.50 per share and expire on December 5, 2012.
On December 5, 2007 Epic also sold notes in the principal amount of
$20,250,000 to a second group of private investors. The notes were sold at their
face value without discount. The notes bear interest annually at 10% per year.
The notes are due and payable on December 5, 2012 and are secured by liens on
all of Epic's assets. The purchasers of the notes also received warrants which
entitle the holders to purchase up to 15,954,545 shares of Epic's common stock.
The warrants are exercisable at a price of $1.65 per share and expire on
December 5, 2012.
Interest on the notes is payable quarterly with the first interest payment
due on January 1, 2008. Beginning December 1, 2008 Epic is required to make
quarterly payments of $1,265,625 toward the principal amount of the notes.
The amounts raised in the December 2007 financing were used as follows:
Amount received from sale of common stock, notes and warrants$ 28,394,003
Less:
Acquisition of Pearl Investment Company (18,720,000)
Reserve for income taxes of Pearl Investment Company
for year ended December 31, 2007 (2,400,000)
14
Payment of Pearl Investment Company bank loans (1,504,884)
Placement agent fees (1,785,000)
Legal, accounting and other professional fees (125,000)
-------------
Remainder to be used as working capital $ 3,859,119
============
Epic's sources and (uses) of cash during the years ended December 31, 2006
and 2005 were:
2006 2005
---- ----
Cash used by operations $(595,807) $(17,386)
Acquisition of oil and gas properties (102,100) --
Borrowings, net of repayments 80,663 --
Sale of common stock 903,195 --
Capital contributions 304,221 17,386
Epic's sources and (uses) of cash during the nine months ended September
30, 2007 and 2006 were:
2007 2006
---- ----
Cash used by operations $(211,284) $(229,349)
Investment in Epic Exploration and Development (22,700) --
Investment in oil and gas properties (1,031) --
Cash resulting from acquisition of Carnrite 48,227
Deposit toward acquisition of Pearl Investment Company (300,000) --
Borrowings, net of repayments 78,827 --
Sale of common stock 523,600 440
Capital contribution -- 305,021
Other (4,902) --
Other than the matters discussed in the "Risk Factors" section of this
prospectus, Epic does not know of any future trends or events which would
materially affect its operating results or financial condition.
During the period from March 28, 2007 through June 30, 2007 the Carnrite
Group's operations used cash of $(287,492), primarily as the result of the
increase in accounts receivable of $1,207,883. During this period capital was
provided primarily through borrowing under a line of credit.
Pearl Investment Company's sources and (uses) of cash during the year
ended December 31, 2006 and 2005 were:
2006 2005
---- ----
Cash provided by operations (1) $8,884,667 $479,560
Purchase of property, plant and equipment (1,132,843) (123,314)
Loan to related party (291,871) --
Distribution to shareholders of Pearl Investment Company (688,872) --
Payments on capital leases (181,115) (179,976)
Advances from line of credit 500,000 --
15
Pearl Investment Company's sources and (uses) of cash during the nine
months ended September 30, 2007 and 2006 were:
2007 2006
---- ----
Cash provided (used) by operations (1) $(5,201,744) $9,063,348
Purchase of property, plant and equipment (1,558,041) (777,862)
Cost of patent technology 1,000,000 --
Collection on advances to related party 291,871 --
Advances from line of credit 500,000 --
Payments on capital leases (711,013) (135,836)
Bank overdraft 889,993 --
Distributions to shareholders of Pearl Investment
Company (580,362) (196,923)
Cash on hand at January 1, 2007 7,369,296 --
(1) During 2006, Pearl Investment Company entered into a contractual
relationship with a customer to procure engineered materials for a gas
plant project. The customer provided cash in a lump sum to Pearl Investment
Company to purchase the materials for use in the project. Pearl Investment
Company recognized the cash received from the customer as a Deposit
Liability in its financial statement for the year ended December 31, 2006.
During the nine months ended September 30, 2007 a significant amount of the
cash provided by the customer was used to purchase materials.
During the nine months ended September 30, 2007 The Carnrite Group and the
Pearl Investment Company had net income of $852,127 and $2,869,689 respectively.
Epic's material future contractual obligations as of December 31, 2006 are
shown below:
Obligation Amount 2007 2008 2009 Thereafter
---------- ------ ---- ---- ---- ----------
Epic - Loan from
private lender $2,580,666 $ 872,990 $ 849,504 $ 849,504 $ 8,668
Pearl Investment -
Bank loans $6,853,328 $3,240,785 $ 2,809,872 $2,470,163 $1,667,492
Epic's loan from the private lender had a principal balance of $3,110,400
as of December 31, 2007 and is secured by Epic's gas wells in Rush County,
Kansas. The loan bears interest at 10% per year and is payable in equal monthly
installments of $72,000. The loan agreement provides that if the monthly net
income from the wells is less than $72,000, the deficit will be added to the
principal amount of the note. If the monthly net income from the wells is
greater than $72,000, the net income is applied to the note principal. Since the
Kansas wells are shut in, it is anticipated that $25,000 will be added to the
note principal each month until the wells return to production.
As a result of the acquisition of The Carnrite Group, the Pearl Investment
Company and Epic Integrated, Epic believes that cash provided by its operations
will satisfy its future capital requirements, including principal and interest
payments required by the terms of the note secured by Epic's Kansas gas wells
and the notes sold in December 2007.
As of the date of this prospectus Epic did not have any off balance sheet
arrangements.
16
Other than the matters discussed in the "Risk Factors" section of this
prospectus, Epic does not know of any future trends or events which would
materially affect its operating results or financial condition.
Fluctuations in crude oil and natural gas prices will significantly affect
Epic's oil and gas operations. Cash flow from oil and gas production depends
upon the quantity of production and the price obtained for such production. An
increase in prices will permit Epic to finance its operations to a greater
extent with internally generated funds, may allow Epic to obtain equity
financing more easily or on better terms, and lessens the difficulty of
attracting financing from industry partners and non-industry investors. However,
price increases heighten the competition for leases increase the costs of
exploration and development activities and, because of potential price declines,
increase the risks associated with the purchase of producing properties during
times that prices are at higher levels.
A decline in oil and gas prices will (i) reduce the cash flow internally
generated by Epic which in turn will reduce the funds available for servicing
debt and exploring for and replacing oil and gas reserves, (ii) increase the
difficulty of obtaining equity and debt financing and worsens the terms on which
such financing may be obtained, (iii) reduce the number of leases which have
reasonable economic terms, (iv) may cause Epic to allow leases to expire based
upon the value of potential oil and gas reserves in relation to the costs of
exploration, (v) result in marginally productive oil and gas wells being
abandoned as non-commercial, and (vi) increase the difficulty of attracting
financing from industry partners and non-industry investors.
Critical Accounting Policies
The preparation of Epic's financial statements requires it to make
estimates and judgments that affect the reported amounts of its assets,
liabilities and expenses and related disclosure of contingent assets and
liabilities. Epic bases its estimates on historical experience and on various
other assumptions that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Although Epic reviews its estimates on an ongoing
basis, actual results may differ from its estimates under different assumptions
or conditions. Epic believes the following accounting policies are critical to
the judgments and estimates used in the preparation of its financial statements:
Accounts Receivable. Accounts receivable represent amounts due from
customers for services performed. Epic extends various terms to its customers,
with payment terms generally 30 days, depending on the customer and country, and
Epic does not require collateral. Epic periodically assesses the collectibility
of its receivables, as necessary, based on various considerations including
customer credit history, payment patterns, and aging of accounts. Once
management determines an account receivable is not collectible, the account is
written off. Epic has not experienced collectibility problems to date. If the
collection history or aging of accounts receivable deteriorates, Epic may have
to record a charge to operations to establish an allowance for doubtful
accounts.
Full Cost Method of Accounting for Crude Oil and Natural Gas Activities .
SEC Regulation S-X defines the financial accounting and reporting standards for
companies engaged in crude oil and natural gas activities. Two methods are
prescribed: the successful efforts method and the full cost method. Epic has
chosen to follow the full cost method under which all costs associated with
17
property acquisition, exploration and development are capitalized. Epic also
capitalizes internal costs that can be directly identified with acquisition,
exploration and development activities and do not include any costs related to
production, general corporate overhead or similar activities. Effective with the
adoption of SFAS No. 143 in 2003, the carrying amount of oil and gas properties
also includes estimated asset retirement costs recorded based on the fair value
of the asset retirement obligation when incurred. Gain or loss on the sale or
other disposition of oil and gas properties is not recognized, unless the gain
or loss would significantly alter the relationship between capitalized costs and
proved reserves of oil and natural gas attributable to a country. Under the
successful efforts method, geological and geophysical costs and costs of
carrying and retaining undeveloped properties are charged to expense as
incurred. Costs of drilling exploratory wells that do not result in proved
reserves are charged to expense. Depreciation, depletion, amortization and
impairment of crude oil and natural gas properties are generally calculated on a
well by well or lease or field basis versus the "full cost" pool basis.
Additionally, gain or loss is generally recognized on all sales of crude oil and
natural gas properties under the successful efforts method. As a result Epic's
financial statements will differ from companies that apply the successful
efforts method since Epic will generally reflect a higher level of capitalized
costs as well as a higher depreciation, depletion and amortization rate on our
crude oil and natural gas properties.
At the time it was adopted, management believed that the full cost method
would be preferable, as earnings tend to be less volatile than under the
successful efforts method. However, the full cost method makes Epic more
susceptible to significant non-cash charges during times of volatile commodity
prices because the full cost pool may be impaired when prices are low. These
charges are not recoverable when prices return to higher levels. Epic's crude
oil and natural gas reserves have a relatively long life. However, temporary
drops in commodity prices can have a material impact on Epic's business,
including impact from the full cost method of accounting.
Ceiling Test. Companies that use the full cost method of accounting for
oil and gas exploration and development activities are required to perform a
ceiling test each quarter. The full cost ceiling test is an impairment test
prescribed by SEC Regulation S-X Rule 4-10. The test determines a limit, or
ceiling, on the book value of oil and gas properties. That limit is basically
the after tax present value of the future net cash flows from proved crude oil
and natural gas reserves, excluding future cash outflows associated with
settling asset retirement obligations that have been accrued on the balance
sheet, plus the lower of cost or fair market value of unproved properties. If
net capitalized costs of crude oil and natural gas properties exceed the ceiling
limit, Epic must charge the amount of the excess to earnings. This is called a
"ceiling limitation write-down." This charge does not impact cash flow from
operating activities, but does reduce Epic's stockholders' equity and reported
earnings. The risk that Epic will be required to write-down the carrying value
of crude oil and natural gas properties increases when crude oil and natural gas
prices are depressed or volatile. In addition, write-downs may occur if Epic
experiences substantial downward adjustments to its estimated proved reserves or
if purchasers cancel long-term contracts for natural gas production. An expense
recorded in one period may not be reversed in a subsequent period even though
higher crude oil and natural gas prices may have increased the ceiling
applicable to the subsequent period.
Estimates of Epic's proved reserves included in this prospectus are
prepared in accordance with GAAP and SEC guidelines. The accuracy of a reserve
estimate is a function of:
18
o the quality and quantity of available data;
o the interpretation of that data;
o the accuracy of various mandated economic assumptions; and
o the judgment of the persons preparing the estimate.
Epic's proved reserves and the present value of estimated future net
revenues from its reserves are based upon estimates which Epic believes are
reasonable. Because these estimates depend on many assumptions, all of which may
substantially differ from future actual results, reserve estimates will be
different from the quantities of oil and gas that are ultimately recovered. In
addition, results of drilling, testing and production after the date of an
estimate may justify material revisions to the estimate. It should not be
assumed that the present value of future net cash flows is the current market
value of Epic's estimated proved reserves. In accordance with SEC requirements,
Epic bases the estimated discounted future net cash flows from proved reserves
on prices and costs on the date of the estimate. Actual future prices and costs
may be materially higher or lower than the prices and costs as of the date of
the estimate.
The estimates of proved reserves materially impact DD&A expense. If the
estimates of proved reserves decline, the rate at which we record DD&A expense
will increase, reducing future net income. Such a decline may result from lower
market prices, which may make it uneconomic to drill for and produce higher cost
fields.
Excluded Costs. Oil and gas properties include costs that are excluded
from capitalized costs being amortized. These amounts represent investments in
unproved properties and major development projects. These costs are excluded
until proved reserves are found or until it is determined that the costs are
impaired. All costs excluded are reviewed at least quarterly to determine if
impairment has occurred. The amount of any impairment is transferred to the
capitalized costs being amortized (the DD&A pool) or a charge is made against
earnings for those international operations where a reserve base has not yet
been established. Impairments transferred to the DD&A pool increase the DD&A
rate. Costs excluded for oil and gas properties are generally classified and
evaluated as significant or individually insignificant properties.
Valuation of Intangibles and Long-Lived Assets. SFAS No. 142 provides that
goodwill and other intangible assets that have indefinite useful lives not be
amortized but, instead, must be tested at least annually for impairment, and
intangible assets that have finite useful lives should continue to be amortized
over their useful lives. SFAS No. 142 also provides specific guidance for
testing goodwill and other non-amortized intangible assets for impairment. SFAS
No. 142 does not allow increases in the carrying value of reporting units that
may result from Epic's impairment test; therefore, Epic may record goodwill
impairments in the future, even when the aggregate fair value of its reporting
units and the company as a whole may increase. Goodwill of a reporting unit will
be tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Examples of such events or
circumstances may include a significant change in business climate or a loss of
key personnel, among others. SFAS No. 142 requires that management make certain
19
estimates and assumptions in order to allocate goodwill to reporting units and
to determine the fair value of reporting unit net assets and liabilities,
including, among other things, an assessment of market conditions, projected
cash flows, cost of capital and growth rates, which could significantly impact
the reported value of goodwill and other intangible assets. Estimating future
cash flows requires significant judgment, and Epic's projections may vary from
cash flows eventually realized.
Epic reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be realizable. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if an
impairment of such asset is necessary. Estimating future cash flows requires
significant judgment, and Epic's projections may vary from cash flows eventually
realized. The effect of any impairment would be to expense the difference
between the fair value of such asset and its carrying value. In addition, Epic
estimates the useful lives of its long-lived assets and other intangibles. Epic
periodically reviews factors to determine whether these lives are appropriate.
Asset Retirement Obligations ("ARO"). The estimated costs of restoration
and removal of facilities are accrued. The fair value of a liability for an
asset's retirement obligation is recorded in the period in which it is incurred
and the corresponding cost capitalized by increasing the carrying amount of the
related long-lived asset. The liability is accreted to its then present value
each period, and the capitalized cost is depreciated by the units of production
method. If the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized. For all periods presented, we have
included estimated future costs of abandonment and dismantlement in the full
cost amortization base and amortize these costs as a component of our depletion
expense.
Revenue Recognition. Oil and gas production sales and consulting fees are
recognized as revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," when persuasive
evidence of an arrangement exists, fees are fixed or determinable, title has
passed (generally upon transmission of oil and gas production and completion of
consulting services), and collection is reasonably assured.
Stock-Based Compensation. Epic adopted FAS 123R on January 1, 2006 and
amortizes stock-based compensation expense on a straight-line basis over the
expected life of the vesting period.
Financial Instruments and Concentrations of Credit Risk. Epic's financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses, derivative financial instruments, and debt. Epic
believes the carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their fair values due to their
short-term nature. The fair value of debt is estimated based on the effective
interest rate method.
Epic generally does not use derivative financial instruments to hedge
exposures to cash-flow risks or market-risks that may affect the fair values of
its financial instruments. However, certain other financial instruments, such as
warrants and embedded conversion features in Epic's debt that are indexed to its
common stock, are classified as equity with the offset treated as a discount on
20
the notes. Such financial instruments are initially recorded at fair value and
amortized to interest expense during the life of the debt.
Epic utilizes various types of financing to fund its business needs,
including debt with warrants attached and other instruments indexed to its
stock. The embedded conversion features utilized in these instruments require an
initial measurement of the fair value of the derivative components. Pursuant to
FAS 133 and EITF 00-19 Epic amortizes the discount associated with these
derivative components to interest expense at each reporting period.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No.157, "Fair Value
Measurements" (FAS 157). FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 applies under other
accounting pronouncements that require or permit fair value measurements and
accordingly, does not require any new fair value measurements. FAS 157 is
effective for fiscal years beginning after November 15, 2007. Epic does not
believe the adoption of FAS 157 will have a material impact on its financial
statements.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109"("FAS 109"), which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. Epic does not believe the adoption of FIN 48 will have a
material impact on its financial statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statement" ("SAB 108"), which provides
guidance on how companies should quantify financial statement misstatements. SAB
108 requires that the effect of misstatements that were not corrected at the end
of the prior year be considered in quantifying misstatements in the current-year
financial statements. Two techniques were identified as being used by companies
in practice to accumulate and quantify misstatements -- the "rollover" approach
and the "iron curtain" approach. The rollover approach quantifies a misstatement
based on the amount of the misstatement originating in the current-year income
statement. Thus, this approach ignores the effects of correcting the portion of
the current-year balance sheet misstatement that originated in prior years. The
iron curtain approach quantifies a misstatement based on the effects of
correcting the cumulative misstatement existing in the balance sheet at the end
of the current year, irrespective of the misstatement's year(s) of origination.
SAB 108 permits companies to adjust for the cumulative effect of misstatements
relating to prior years in the carrying amount of assets and liabilities as of
the beginning of the current fiscal year, with an offsetting adjustment to the
opening balance of retained earnings in the year of adoption.
21
In February 2007, the Financial Accounting Standards Board (the "FASB")
issued FASB Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities -- Including an Amendment of FASB Statement No. 115 ("SFAS
159"). This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions in
SFAS 159 are elective; however, the amendment to FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, applies to all
entities with available-for-sale and trading securities. The FASB's stated
objective in issuing this standard is as follows: "to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions."
The fair value option established by SFAS 159 permits all entities to
choose to measure eligible items at fair value at specified election dates. A
business entity will report unrealized gains and losses on items for which the
fair value option has been elected in earnings (or another performance indicator
if the business entity does not report earnings) at each subsequent reporting
date. The fair value option: (i) may be applied instrument by instrument, with a
few exceptions, such as investments otherwise accounted for by the equity
method; (ii) is irrevocable (unless a new election date occurs); and (iii) is
applied only to instruments and not to portions of instruments.
SFAS 159 is effective as of the beginning of an entity's first fiscal year
that begins after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity makes that choice
in the first 120 days of that fiscal year and also elects to apply the
provisions of FASB Statement No. 157, Fair Value Measurements ("SFAS 157"). Epic
is currently assessing the impact of SFAS 159 on its financial statements.
MARKET FOR EPIC'S COMMON STOCK
As of February 29, 2008 there were approximately 110 record holders of Epic's
common stock. Epic's common stock began trading on the OTC Bulletin Board on
October 30, 2006 under the symbol "EPCC". Shown below are the range of high and
low closing prices for Epic's common stock for the periods indicated as reported
by the NASD. The market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
Quarter Ended High Low
December 31, 2006 $ 2.80 $ 1.25
March 31, 2007 $ 3.07 $ 2.78
June 30, 2007 $ 3.20 $ 2.90
September 30, 2007 $ 3.83 $ 3.15
December 31, 2007 $ 4.29 $ 2.30
Holders of common stock are entitled to receive dividends as may be
declared by the Board of Directors out of legally available funds and, in the
event of liquidation, to share pro rata in any distribution of Epic's assets
after payment of liabilities. The Board of Directors is not obligated to declare
a dividend. Epic has not paid any dividends on its common stock and Epic does
not have any current plans to pay any common stock dividends.
22
BUSINESS
Background
Epic was incorporated in Colorado on June 6, 1989 under the name San Juan
Financial. Following its formation Epic was relatively inactive until April
2006, when its management changed and it become involved in oil and gas
exploration and development.
On March 11, 2005 the shareholders of Epic approved a 1-for-20 forward
split of Epic's common stock. Unless otherwise indicated, all per share data in
this report has been revised to reflect this forward stock split.
On May 15, 2006 Epic's shareholders:
o approved amendments to its Articles of Incorporation which changed the
corporate name to Epic Capital Group, Inc., and
o changed Epic's authorized capitalization to 100,000,000 shares of
common stock and 10,000,000 shares of preferred stock.
Between October 2006 and April 2007 Epic raised $1,455,100 from the sale
of 1,455,100 shares of its common stock, plus 491,500 Series A warrants and
963,600 Series B warrants, to private investors. The Series A warrants expired
on December 31, 2007. Each Series B Warrant entitles the holder to purchase one
share of Epic's common stock at a price of $2.50 per share at any time prior to
September 30, 2009.
On December 1, 2006 Epic's shareholders approved an amendment to its
Articles of Incorporation which changed the corporate name to Epic Energy
Resources, Inc.
In December 2007 Epic sold to private investors:
o 5,429,335 shares of its common stock for gross proceeds of $8,144,007,
or $1.50 per share, plus warrants which entitle the holders to
purchase up to 5.429,335 shares of Epic's common stock.
o notes in the principal amount of $20,250,000 plus warrants which
entitle the holders to purchase up to 15,954,545 shares of Epic's
common stock.
During 2007 Epic acquired the Carnrite Group, LLC and Pearl Investment
Company. The Carnrite Group and Pearl Investment Company provide engineering,
construction management, operations, maintenance, field, and project management
services to the oil, gas and energy industry.
In February 2008, Epic acquired Epic Integrated Solutions, LLC, an
unaffiliated entity. Epic Integrated provides the oil and gas industry with
specialized training, operations documentation and data management services for
the start-up and operation of complex energy production facilities.
23
Unless otherwise indicated, all references to Epic include the operations
of the Carnrite Group, Pearl Investment Company and Epic Integrated, subsequent
to the dates that Epic acquired these companies.
As of the date of this prospectus, Epic's revenues from the sale of oil
and gas were not significant. However, Epic plans to evaluate undeveloped oil
and gas prospects and participate in drilling activities on prospects which in
the opinion of management are favorable for the production of oil or gas. Epic
may also acquire other producing oil and gas properties which have the potential
to support additional oil and gas wells.
Consulting Services
- -------------------
Through the late 1950's the early oil and gas companies such as Standard
Oil, Texaco and Mobil were fully vertically integrated enterprises with business
units that included oil and gas drilling, pipeline transportation, refining, gas
stations and motor oils. The consensus was that companies needed to own the
entire chain to control the product and maximize profits.
In the late 1970's a new model emerged with smaller companies being
created that focused on only one aspect of the industry. Independent production
companies were created to find, drill and produce oil and gas. Pipeline
companies were formed to deliver product from producers to refineries and other
end users. Refining companies were organized to refine oil and gas into usable
fuels and products. And, finally retail oriented companies were created to
developed innovative ways to market gasoline (the birth of the gasoline station
as a convenience store!).
Epic sees the next natural progression to be the separation of oil and gas
producers into two groups: those that want to explore and drill for oil and gas
and those that want to focus on the efficient processing of oil and gas before
it is transported.
Because of increasing demand and prices, major integrated oil companies
and large independents are exploring for new fields in areas such as West
Africa, Brazil, Venezuela, Trinidad, the Caspian, Western Russia and others. The
scale of these projects requires significant financial and human resources.
These projects usually require assembling a large international team consisting
of staff from the oil company, a large engineering firm, a large fabrication and
construction company to build and assemble the structure and processing
equipment, and an operations and maintenance partner to staff the project and
manage the start-up. This rush to large, international, projects is consuming a
substantial portion of the existing engineering and construction capability in
the oil and gas industry. Many of the majors and larger independent oil and gas
companies are exiting the domestic market and turning their capital, manpower
and technology to new, high investment areas around the world. The service
sector, especially the large engineering and construction companies, are
following their main customers to these international projects leaving few
companies to compete for domestic projects. At the same time, record drilling
activity in the US onshore market will require more production, process and
transportation infrastructure.
Due to the high operating costs and low production rates of many older oil
and gas fields, most producers have been limited in their ability to maintain
the operating condition of pipelines, compressor stations, gathering systems,
SCADA systems, secondary recovery injection plants, and similar equipment.
24
In August 2007 Epic acquired the Carnrite Group LLC for 3,177,812 shares
of common stock. In connection with this acquisition, 1,673,036 additional
shares of common stock were issued to key officers of The Carnrite Group as
retention shares that will vest during the two year period ending March 28,
2009. All or part of these shares will be returned to Epic if one or more
officers of Carnrite voluntarily terminate their employment prior to March 28,
2009. The Carnrite Group currently employs five professionals in its offices in
Houston, Texas and is presently providing services to clients in the United
States, Argentina, Kazakhstan, Nigeria and Russia.
In December 2007 Epic acquired Pearl Investment Company for 1,486,240
shares of its common stock and cash of $18,720,000. Up to 3,313,760 additional
shares may be issued in the future to key employees and officers of Pearl
Investment Company subject to certain vesting requirements. Pearl Investment
Company currently employs over 200 professionals working from six offices and
serves clients in the greater Rocky Mountain Region and the Middle East.
In February 2008 Epic acquired Epic Integrated Solutions, LLC, an
unaffiliated entity, for cash and shares of its restricted common stock. At
closing, Epic paid $600,000 and issued 1,000,000 shares of its common stock to
the three owners of Epic Integrated. An additional $1,700,000 will be paid to
the three owners in periodic installments during 2008 and 2009. The 1,000,000
shares were issued to Epic Integrated's owners, each of whom is also an officer
of Epic Integrated. The shares issued to each owner will vest over a three-year
period. All or a portion of the shares issued to each officer will be forfeited
and returned to Epic if the officer voluntarily terminates his or her employment
prior to February 20, 2011.
Through its subsidiaries the Carnrite Group, Pearl Investment Company and
Epic Integrated, Epic provides the following consulting services to the oil, gas
and energy industry:
o monitoring performance of wells and reservoirs,
o techniques to improve well productivity and increase recoverable reserves,
o drilling and completion of oil and gas wells,
o reservoir and formation evaluation,
o integration of data workflows and operational processes,
o oilfield project management,
o design of energy and petrochemical projects,
o construction management,
o commodity marketing and trading,
o financial analysis,
o organizational design,
o specialized training,
o operations documentation,
o data management.
Backlog represents the revenue Epic expects to realize in the future from
performing consulting work under multi-period contracts. Epic generally includes
total expected revenue in the backlog when a contract is awarded and the scope
of the services are determined. Backlog is not defined by generally accepted
accounting principles and Epic's process for determining backlog may not be
comparable to the methodology used by other companies in determining backlog.
Backlog may not be indicative of future operating results. Not all of Epic's
consulting revenue is recorded in backlog for a variety of reasons, including
25
the fact that some projects begin and end within a short-term period. Many
contracts do not provided for a fixed amount of work to be performed and are
subject to modification or termination by the customer. The termination or
modification of any one or more sizeable contracts or the addition of other
contracts may have a substantial immediate effect on backlog.
For long-term contracts, the amount included in backlog is limited to
twelve months. If the contract duration is indefinite, projects included in
backlog are limited to the estimated revenue within the following twelve months.
Some contracts provide maximum dollar limits, with authorization to perform work
under the contract being agreed upon on a periodic basis with the customer. In
these arrangements, only the amounts authorized are included in backlog.
As of November 30, 2007, Epic's backlog for consulting services to be
provided in the future was approximately $22.5 million. This compares to a
combined backlog of approximately $16.5 million as of November 30, 2006, all of
which was attributed to Pearl Investment Company since The Carnrite Group was
not formed until March 2007.
During the year ended December 31, 2006 two customers accounted for 78% of
the total revenues of Pearl Investment Company. During the year ended December
31, 2005 four customers accounted for 82% of Pearl Investment Company's total
revenues.
Oil and Gas Exploration and Development
- ---------------------------------------
Epic plans to evaluate undeveloped oil and gas prospects and participate
in drilling activities on prospects which in the opinion of management are
favorable for the production of oil or gas. If, through its review, a
geographical area indicates geological and economic potential, Epic will attempt
to acquire leases or other interests in the area and assemble a prospect. Epic
may then attempt to sell a portion of its leasehold interests in a prospect to
unrelated third parties, thus sharing the risks and rewards of the exploration
and development of the prospect with the joint owners pursuant to an operating
agreement. One or more wells may be drilled on a prospect, and if the results
indicate the presence of sufficient oil and gas reserves, additional wells may
be drilled on the prospect.
Epic may also acquire producing oil and gas properties which have the
potential to support additional oil and gas wells.
Current Operations
- ------------------
Epic has a 100% working interest (approximately 82% net revenue
interest) in 58 gas wells located on 28,600 acres in Rush County, Kansas. In
January 2007 the gas wells were shut in due to the closure of the plant which
was purchasing the gas produced from Epic's wells. Epic is in negotiations with
another company which is interested in purchasing the gas from these wells.
Epic has a 50% working interest (approximate 40% net revenue interest) in
seven shut-in gas wells located on 6,000 acres in Kay County, Oklahoma. Epic
estimates that it will cost approximately $7,000 (with Epic being responsible
for its 50% share) to rework each shut-in well and place the well back on
production. Two wells were successfully tested for commercial production
26
following workovers in 2007. Depending on weather conditions, Epic plans to
begin reworking the remaining shut-in wells during the first quarter of 2008.
In July 2007 Epic formed a joint venture, Epic Exploration and Production
LLC, with a private investment firm to acquire energy assets and oil and gas
properties. Epic will manage the operations of the joint venture. The private
investment firm is responsible for providing capital required to acquire the
assets on a project-by-project basis.
Epic will receive 20% of the net income from any asset or oil and gas
property acquired by the joint venture until the private investment firm
receives 100% of the equity contributed by the private investment firm to
acquire the asset or property. Thereafter, the net income from the asset or
property will be allocated equally between Epic and the private investment firm.
As of the date of this prospectus, the joint venture was negotiating to acquire
working interests, varying from 50% to 100%, in producing oil wells in Fort Bend
and Bazoria counties, Texas.
Epic did not participate in the drilling of any wells in 2006 or 2007.
The following table shows, as of December 31, 2006, Epic's producing
wells, Developed Acreage, and Undeveloped Acreage, excluding service (injection
and disposal) wells:
Productive Wells (1) Developed Acreage Undeveloped Acreage
-------------------- ----------------- -------------------
Gross Net Gross Net Gross Net
Oklahoma 2 1 80 40 5,920 2,960
Kansas 58 58 2,400 2,400 26,200 26,200
---- --- ----- ----- ------- -------
Totals 60 59 2,480 2,440 32,120 29,160
==== ==== ====== ====== ======= =======
(1) All wells are gas wells.
Developed acreage represents the number of acres which are allocated or
assignable to producing wells or wells capable of production.
Undeveloped acreage represents leasehold interests on which wells have
not been drilled or completed to the point that would permit the production of
commercial quantities of natural gas and oil regardless of whether the leasehold
interest is classified as containing proved undeveloped reserves.
The following table shows, as of December 31, 2006 the status of Epic's
gross developed and undeveloped acreage.
State Gross Acreage Held by Production Not Held by Production
- ----- ------------- ------------------ ----------------------
Kansas 6,000 -- 6,000
Oklahoma 28,600 -- 28,600
Acres held by production remain in force so long as oil or gas is produced
from the well on the particular lease. Leased acres which are not held by
production require annual rental payments to maintain the lease until the first
27
to occur of the following: the expiration of the lease or the time oil or gas is
produced from one or more wells drilled on the lease acreage. At the time oil or
gas is produced from wells drilled on the leased acreage the lease is considered
to be held by production. Since the wells on the acreage shown in the table are
shut-in, all acreage is classified as "Not Held By Production".
Epic does not own any overriding royalty Interests.
Title to properties is subject to royalty, overriding royalty, carried,
net profits, working and other similar interests and contractual arrangements
customary in the oil and gas industry, to liens for current taxes not yet due
and to other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records). However,
drilling title opinions are always prepared before commencement of drilling
operations.
The following table shows Epic's net production of oil and gas, average
sales prices and average production costs during the year ended December 31,
2006. Production Data:
Production -
Oil (Bbls) --
Gas (Mcf) 18,902
Average sales price -
Oil (Bbls) --
Gas (Mcf) 5.02
Average production
costs per MCF 2.86
Production costs may vary substantially among wells depending on the
methods of recovery employed and other factors, but generally include severance
taxes, administrative overhead, maintenance and repair, labor and utilities.
Epic is not obligated to provide a fixed and determined quantity of oil or
gas in the future. During the last fiscal year, Epic did not have, nor does it
now have, any long-term supply or similar agreement with any government or
governmental authority.
Below are estimates of Epic's net proved reserves and the present value of
estimated future net revenues from its reserves based upon the standardized
measure of discounted future net cash flows relating to proved oil and gas
reserves in accordance with the provisions of Statement of Financial Accounting
Standards No. 69, "Disclosures about Oil and Gas Producing Activities" (SFAS No.
69). The standardized measure of discounted future net cash flows is determined
by using estimated quantities of proved reserves and the periods in which they
are expected to be developed and produced based on period-end economic
conditions. The estimated future production is priced at period-end prices,
except where fixed and determinable price escalations are provided by contract.
The resulting estimated future cash inflows are then reduced by estimated future
costs to develop and produce reserves based on period-end cost levels. No
deduction has been made for depletion, depreciation or for indirect costs, such
28
as general corporate overhead. Present values were computed by discounting
future net revenues by 10% per year.
December 31, 2006
--------------------
Oil Gas
(Bbls) (Mcf)
Proved reserves 3,717 4,970,318
Estimated future net cash flows from proved
oil and gas reserves $ 13,355,253
Present value of future net cash flows from
proved oil and gas reserves $ 7,354,511
Epic's proved reserves include only those amounts which Epic reasonably
expects to recover in the future from known oil and gas reservoirs under
existing economic and operating conditions, at current prices and costs, under
existing regulatory practices and with existing technology. Accordingly, any
changes in prices, operating and development costs, regulations, technology or
other factors could significantly increase or decrease estimates of Proved
Reserves.
Government Regulation
- ---------------------
Although Epic's consulting business is not subject to any particular
governmental regulations, Epic's oil and gas operations are subject to numerous
environmental laws and regulations. These laws and regulations include:
o the Comprehensive Environmental Response, Compensation and Liability
Act;
o the Resources Conservation and Recovery Act;
o the Clean Air Act;
o the Federal Water Pollution Control Act; and
o the Toxic Substances Control Act.
In addition to the federal laws and regulations, states often have
numerous environmental, legal, and regulatory requirements which Epic must
comply with.
Epic does not expect that costs pertaining to environmental compliance
will have a material adverse effect on its operations.
Various state and federal agencies regulate the production and sale of oil
and natural gas. All states in which Epic plans to operate impose restrictions
on the drilling, production, transportation and sale of oil and natural gas.
The Federal Energy Regulatory Commission (the "FERC") regulates the
interstate transportation and the sale in interstate commerce for resale of
natural gas. The FERC's jurisdiction over interstate natural gas sales has been
substantially modified by the Natural Gas Policy Act under which the FERC
continued to regulate the maximum selling prices of certain categories of gas
sold in "first sales" in interstate and intrastate commerce.
29
Epic's sales of any natural gas will be affected by intrastate and
interstate gas transportation regulation. Beginning in 1985, the FERC adopted
regulatory changes that have significantly altered the transportation and
marketing of natural gas. These changes are intended by the FERC to foster
competition by, among other things, transforming the role of interstate pipeline
companies from wholesale marketers of natural gas to the primary role of gas
transporters. All natural gas marketing by the pipelines is required to divest
to a marketing affiliate, which operates separately from the transporter and in
direct competition with all other merchants. As a result of the various omnibus
rulemaking proceedings in the late 1980s and the individual pipeline
restructuring proceedings of the early to mid-1990s, the interstate pipelines
must provide open and nondiscriminatory transportation and
transportation-related services to all producers, natural gas marketing
companies, local distribution companies, industrial end users and other
customers seeking service. Through similar orders affecting intrastate pipelines
that provide similar interstate services, the FERC expanded the impact of open
access regulations to intrastate commerce.
Federal, state, and local agencies have promulgated extensive rules and
regulations applicable to Epic's oil and gas exploration, production and related
operations. Most states require permits for drilling operations, drilling bonds
and the filing of reports concerning operations and impose other requirements
relating to the exploration of oil and natural gas. Many states also have
statutes or regulations addressing conservation matters including provisions for
the unitization or pooling of oil and natural gas properties, the establishment
of maximum rates of production from oil and natural gas wells and the regulation
of spacing, plugging and abandonment of such wells. The statutes and regulations
of some states limit the rate at which oil and natural gas is produced from
Epic's properties. The federal and state regulatory burden on the oil and
natural gas industry increases Epic's cost of doing business and affects its
profitability.
Competition
- -----------
Consulting Services
- -------------------
The energy consulting industry is highly competitive. Competitors include
large, multinational corporations such as SAIC, Accenture, KBR and Baker Energy
as well as many medium sized and small consulting firms. Because the energy
consulting industry is large and crosses numerous geographic lines, a meaningful
estimate of the total number of Epic's competitors is not possible.
Competitive factors include:
o price;
o service delivery (including the ability to deliver services quickly);
and
o technical proficiency.
Oil and Gas
- -----------
Epic will be faced with strong competition from many other companies and
individuals engaged in the oil and gas business, many of which are very large,
with substantial capabilities and well established. Epic will compete with these
individuals and companies, many of which have greater financial resources and
larger technical staffs. Although it is nearly impossible to estimate the number
30
of competitors; it is known that there are a large number of companies and
individuals in the oil and gas business.
Exploration for and production of oil and gas are affected by the
availability of pipe, casing and other tubular goods and certain other oil field
equipment including drilling rigs and tools. Epic will depend upon independent
drilling contractors to furnish rigs, equipment and tools to drill its wells.
Higher prices for oil and gas may result in competition among operators for
drilling equipment, tubular goods and drilling crews which may affect Epic's
ability expeditiously to drill, complete, recomplete and work-over its wells.
However, Epic has not experienced and does not anticipate difficulty in
obtaining supplies, materials, drilling rigs, equipment or tools.
The market for oil and gas is dependent upon a number of factors beyond
Epic's control, which at times cannot be accurately predicted. These factors
include the proximity of wells to, and the capacity of, natural gas pipelines,
the extent of competitive domestic production and imports of oil and gas, the
availability of other sources of energy, fluctuations in seasonal supply and
demand, and governmental regulation. In addition, there is always the
possibility that new legislation may be enacted which would impose price
controls or additional excise taxes upon crude oil or natural gas, or both.
Oversupplies of natural gas can be expected to recur from time to time and may
result in the gas producing wells being shut-in. Increased imports of natural
gas, primarily from Canada, have occurred and are expected to continue. Such
imports may adversely affect the market for domestic natural gas.
Since the early 1970's the market price for crude oil has been
significantly affected by policies adopted by the member nations of Organization
of Petroleum Exporting Countries ("OPEC"). Members of OPEC establish prices and
production quotas among themselves for petroleum products from time to time with
the intent of controlling the current global supply and consequently price
levels. Epic is unable to predict the effect, if any, that OPEC or other
countries will have on the amount of, or the prices received for, crude oil and
natural gas produced and sold from Epic's wells.
Gas prices, which were once effectively determined by government
regulations, are now largely influenced by competition. Competitors in this
market include producers, gas pipelines and their affiliated marketing
companies, independent marketers, and providers of alternate energy supplies,
such as residual fuel oil. Changes in government regulations relating to the
production, transportation and marketing of natural gas have also resulted in
significant changes in the historical marketing patterns of the industry.
Generally, these changes have resulted in the abandonment by many pipelines of
long-term contracts for the purchase of natural gas, the development by gas
producers of their own marketing programs to take advantage of new regulations
requiring pipelines to transport gas for regulated fees, and an increasing
tendency to rely on short-term contracts priced at spot market prices.
General
- -------
As of December 31, 2007, Epic and its subsidiaries, the Carnrite Group and
Pearl Investment Company, had 220 full time employees.
31
Epic's offices are located at 10655 Six Pines, Suite 210, The Woodlands,
Texas 77380. Approximately 1,500 square feet of office space is occupied under
the lease requiring rental payments of $2,400 per month. The lease on this space
is occupied on a month-to-month basis.
The offices of The Carnrite Group are located at 219 W. 11th Street,
Houston, Texas. The 1,480 square feet of office space is occupied under the
lease requiring rental payments of $2,500 per month through April 2008, $2,750
per month thru April 2009 and $3,000 per month through April 2010. The lease on
this space expires in April 2010.
The primary offices of Pearl Investment Company are located at 7110
Jefferson Avenue, Lakewood, Colorado. The 30,552 square feet of office space is
occupied under the lease requiring rental payments of $42,168 per month. The
third floor lease on this space expires in July 2011 and the second floor lease
on this space expires in March 2012. Pearl has eight branch offices and
facilities in Colorado, Wyoming, Montana and Utah. The rental for all of the
branch offices is approximately $18,900 per month.
MANAGEMENT
Name Age Position
---- --- --------
Rex Doyle 49 Chief Executive Officer and a Director
John Ippolito 48 President
David Reynolds 56 Executive Vice President and Secretary
R. Bret Rhinesmith 44 Executive Vice President
Michael Kinney 50 Executive Vice President, Principal
Financial and Accounting Officer
W. Robert Eissler 57 Director
Dr. Robert Ferguson 64 Director
Kevin G. McMahon 40 Director
Rex P. Doyle has been an officer and director of Epic since April 4, 2006.
Mr. Doyle was a Vice President of Michael Baker Corporation (AMEX:BKR) between
August 2000 and September 2002. Between September 2002 and April 2004 Mr. Doyle
was Vice President of Business Development for Baker Energy, a subsidiary of
Michael Baker Corporation. Between April 2005 and April 2006 Mr. Doyle was
Senior Vice President of Global Operations for Baker Energy and an officer of
Michael Baker Corporation. Mr. Doyle graduated with a BS in Mechanical
engineering from The Ohio State University, and has been a licensed professional
engineering in the state of Louisiana(inactive). He graduated with a Masters of
Business Administration, with Distinction, from the University of Michigan, and
also graduated from the Harvard IPAA Program for Owners and Executives.
John S. Ippolito has been an officer of Epic since April 4, 2006. Mr.
Ippolito was Business Development Manager - North and South America Integrated
Project Management Division for Schlumberger Ltd. between 2000 and August 2003.
Between August 2003 and April 2006 Mr. Ippolito was Senior Business Development
Director, Continental U.S., and Business Manager - Large Asset Management
Contracts, for Baker Energy, a subsidiary of Michael Baker Corporation.
32
David R. Reynolds has been an officer of Epic since April 4, 2006. Mr.
Reynolds was a principal of Orion Oil & Gas L.L.C. between 2003 and December
2005. Between January 2006 and April 2006 Mr. Reynolds was working on a business
plan, adopted by Epic in April 2006, for an oil and gas exploration/energy
consulting company. From 2001 to 2003 Mr. Reynolds was with the Business
Development Group of Union Oil of California.
R. Bret Rhinesmith was appointed an officer in December 2007 of Epic
following Epic's acquisition of the Pearl Investment Company. Since 1994 Mr.
Rhinesmith has been the President of the Pearl Investment Company and its
predecessor companies.
W. Robert Eissler has been a director of Epic since December 2006. Since
1983 Mr. Eissler has been the President of Eissler & Associates, an executive
recruiting firm based in The Woodlands, Texas. Mr. Eissler also serves as Texas
State Representatives for the 80th Legislature (2006-2007).
Michael E. Kinney has been Epic's Executive Vice President and Chief
Financial Officer since February 2008. Between 2005 and February 2008, Mr.
Kinney was employed by Accretive Solutions, a financial consulting firm, leading
its corporate governance team which focused on small to mid-size energy clients
in the Houston area. From 2003 to 2005, Mr. Kinney was the Internal Audit
Director for Stewart & Stevenson, Inc., a manufacturer of tactical vehicles for
the federal government. Between 1996 and 2001 Mr. Kinney held several positions
with Federal Express, including director of logistics operations (1999 to 2001)
and managing director of audit (1997 to 1999) with responsibility for financial
and operational audits. Mr. Kinney has also worked in various audit capacities
with i2 Technologies and Textron. Mr. Kinney, age 49 is a CPA, and holds an MBA
in Finance & Information Technology from Dallas Baptist University and a BBA in
Accounting from the University of Texas at Arlington.
Dr. Robert M. Ferguson has been a director of Epic since December 2006.
Since October 2005 Dr. Ferguson has been the President of the Leadership
Institute for Vision and Ethics (Live) in Houston, Texas. Between January 2002
and September 2005 Dr. Ferguson was an independent consultant in the areas of
organization and leadership. Since 2002 Dr. Ferguson has been an Adjunct
Professor of Philosophy and Business Ethics at the Lone Star College, Montgomery
in The Woodlands, Texas, and an Adjunct Professor in Business Ethics and
Biblical Studies at Belhaven College in Houston, Texas. Since February 2008 Dr.
Ferguson has been pastor at the Faith Fellowship Church in Spring, Texas.
Between February January 2002 and October 2005 he was pastor at Spring Cypress
Presbyterian Church in Spring, Texas.
Kevin G. McMahon has been a director of Epic since July 2007. Mr. McMahon
is the Company's financial expert and serves as the Chairman of the Audit
Committee. Since May 2006, Mr. McMahon has been Senior Vice President of
Internal Audit and Sarbanes Oxley Compliance for Calpine Corp. From September
2005 to May 2006, he was the Vice President and General Auditor for Exide
Technologies. From March 1997 to August 2005, he was the Vice President of
Internal Audit. Mr. McMahon has over 19 years experience in banking, public
accounting, healthcare, manufacturing and energy/power generation. Kevin has a
master of business administration degree from Palm Beach Atlantic University and
a bachelor of science degree in accounting from the State University of New
York, and is a Certified Internal Auditor.
33
Epic has a compensation committee. Dr. Robert Ferguson is the only member
of the compensation committee. Epic's audit committee is comprised of Dr. Robert
Ferguson and Kevin G. McMahon. Kevin McMahon serves as Epic's financial expert.
All of Epic's directors, with the exception of Rex Doyle, are independent as
that term is defined in Section 121(A) of the listing standards of the American
Stock Exchange.
Epic has adopted a Code of Ethics applicable to Epic's principal
executive, financial, and accounting officers and persons performing similar
functions.
Changes in Management
On April 4, 2006, Mark W. Moniak, Epic's only officer and director,
appointed Rex Doyle, John S. Ippolito and David R. Reynolds as directors of
Epic. Following these appointments Mr. Moniak, resigned as an officer and
director of Epic.
Epic's directors then appointed the following persons to be officers:
Name Position
Rex P. Doyle Chief Executive and Principal Financial Officer
John S. Ippolito President
David R. Reynolds Executive Vice President and Secretary
On November 6, 2006 John Sherwood was appointed a director of Epic. On
November 30, 2006, John Ippolito and David Reynolds resigned as directors of
Epic, but remained executive officers of Epic. On December 1, 2006 Robert
Eissler and Dr. Robert Ferguson were appointed directors of Epic. On July 1,
2007 Kevin G. McMahon was appointed as a director of Epic. On October 1, 2007
Mr. Sherwood resigned as a director. R. Bret Rhinesmith was appointed as an
officer of Epic in December 2007.
Management of Subsidiaries
The managing directors of the Carnrite Group are:
Name Age
Lea Ann Robertson 51
Rita L. Williams 47
Sherri Herzig 41
Gillian A. Tilbury 44
Carolyn Stortstrom 47
All of Carnrite's managing directors have been employed by Carnrite since
its inception in March 2007. Between 2002 and the formation of Carnrite, all of
these persons were employed by Jeffries Energy Consulting LLC.
34
The officers of Pearl Investment Company are:
Name Age Position
R. Bret Rhinesmith 44 President
Mona Walker 41 Chief Financial Officer
Curtis L. Good 48 Vice President
Patrick W. Murray 50 Vice President
Information concerning the management of Pearl Investment Company
(formerly named Pearl Development Company) follows. For purposes of the
biographical information, employment by any subsidiary of Pearl Investment is
considered to be employment by the parent company, Pearl Investment Company.
R. Bret Rhinesmith has been an officer of Epic since December 2007. Mr.
Rhinesmith has been the Chief Executive Officer of Pearl Investment Company
since 1993.
Mona Walker has been an officer of Pearl Investment Company since October
2006. Between 2005 and 2006 Ms. Walker was the Director of Accounting and
Finance for Centennial Energy, a natural gas liquids marketing company. Between
1990 and 2005 Ms. Walker was the Risk & Financial Planning Manager for an
affiliate of MarkWest Hydrocarbons, Inc.
Curtis L. Good has been an officer of the Pearl Investment Company since
2004. Between 2000 and 2004 Mr. Good was a consultant with J.M. Huber
Corporation where he consulted in the construction of pipelines, roads,
reservoirs, and water and gravel pits.
Patrick W. Murray has been an officer of Pearl Investment Company since
2006. Between 1995 and 2006 Mr. Murray managed his own investments. Between 1988
and 1995 Mr. Murray was Chief Financial Officer and Vice President of Finance
for MarkWest Hydrocarbon Partners, Ltd.
The managing directors of Epic Integrated are:
Name Age
Joseph Wright 27
Richard Dean Harvey 47
Traci Marlene Harvey 46
Joseph Wright has been senior consultant with Epic Integrated Solutions since
February 2006. Between 1997 and 2006, Mr. Wright was employed with Baker Energy
in various capacities including senior technical consultant, technology manager,
systems integrator, and network administrator.
35
Richard D. Harvey has been a training consultant and technical manager with Epic
Integrated Solutions since February 2006. Between March 2000 and February 2006,
Mr. Harvey was Technical Manager with Baker Energy responsible for project
development, planning, research and development, project estimates, budgeting,
quality control, personnel administration and vendor relationships for major
training projects.
Traci Harvey has been a training consultant and project manager with Epic
Integrated Solutions since 2005. Between 2002 and 2005, Ms. Harvey was employed
by Baker Energy in project, personnel and budget management, project
coordination, training and graphic design.
EXECUTIVE COMPENSATION
The following table shows the compensation paid or accrued to Epic's
Principal Executive and Financial Officer and the four other most highly
compensated executive officers of Epic, or Epic's subsidiaries, during the years
ended December 31, 2007 and 2006.
All
Other
Annual
Stock Option Compen-
Name and Principal Fiscal Salary Bonus Awards Awards sation
Position Year (1) (2) (3) (4) (5) Total
- ------------------ ----- ------ ----- ------ ------- ------- ------
Rex Doyle, Chief 2007 $210,000 -- $990,000 $ 72,713 -- $1,272,713
Principal Executive 2006 $118,750 -- -- $101,439 -- $ 220,189
and Financial Officer
John Ippolito 2007 $175,000 -- $990,000 $45,321 -- $1,210,321
President since 2006 $105,625 -- -- $101,439 -- $ 207,064
April 4, 2006
R. Bret Rhinesmith, 2007 $343,264 $300,000 -- -- $12,917 $ 656,181
President of Pearl 2006 $156,398 -- -- -- -- $ 156,398
Investment Company
Pat Murray 2007 $205,192 $500,000 -- -- $ 9,587 $ 714,779
President of Pearl 2006 $ 76,154 $ 85,000 $ 477 $ 161,631
Development
(1) The dollar value of base salary (cash and non-cash) earned. (2) The dollar
value of bonus (cash and non-cash) earned.
(3) The fair value of stock issued for services computed in accordance with FAS
123R on the date of grant.
(4)The fair value of options granted computed in accordance with FAS 123R on the
date of grant. (5) All other compensation received that Epic could not properly
report in any other
column of the table.
In February 2008 Michael Kinney replaced Rex Doyle as Epic's Principal
Financial and Accounting Officer.
36
The compensation shown in the table for R. Bret Rhinesmith and Patrick
Murray was paid by Pearl Investment Company. Epic acquired Pearl Investment
Company in December 20070. Mr. Rhinesmith has been the President of Pearl
Investment Company since 1994. Mr. Murray joined Pearl Investment Company in
2006.
Epic does not have an employment agreement with any of its officers except
for Mr. Rhinesmith.
Carnrite has employment agreements with each of its managing directors
which provide that each managing director will be paid an annual salary of
$150,000.
Each employment agreement continues in effect until the death or
disability of the employee, or upon 30 days notice of termination given by
either Carnrite or the employee. If the employment agreement is terminated by
Carnrite without cause, then Carnrite will be required to pay the employee
one-twelfth of the employee's then current salary.
For purposes the employment agreements "cause" means.
o The commission by the employee of acts that's are both dishonest and
demonstrably injurious to Carnrite in any material respect;
o The failure of the employee to observe and comply with Carnrite's
published policies;
o The willful failure the employee to observe and comply with any lawful
and ethical directions or instruction of Carnrite's Directors;
o The failure of the employee to perform, in any material respect, her
duties with Carnrite, but only if such failure was not caused by
disability or incapacity and shall have continued unremedied for more
than 30 days after written notice is given to the employee by
Carnrite;
o Any willful conduct on the part of the employee that prejudices, in
any material respect, the reputation of Carnrite.
Epic has employment agreements with the officers of Pearl Investment which
provide for the following:
Name of Employee Annual Salary
R. Bret Rhinesmith $310,000
Mona L. Walker $175,000
Curtis L. Good $220,000
Patrick W. Murray $220,000
37
Each employment agreement continues in effect until the death or
disability of the employee, or upon 30 day's notice of termination given by
either Epic or the employee. If the employment agreement is terminated by Epic
without cause, then Epic will be required to pay the employee the greater of:
o Three months of employee's then current salary;
o The amount the employee would have received had the employee continued
to work between the date of termination and September 1, 2010.
o If the employment agreement is terminated after September 1, 2010, the
amount the employee would have received had the employee continued to
work between the date of termination and the next following September
1st.
For purposes of the employment agreements, "cause" means:
o An act of fraud, embezzlement, or theft in the course of employment
with Epic;
o Unauthorized intentional disclosure of Epic's trade secrets or
confidential information;
o Violation of any federal, state or local law, ordinance, rule, or
regulation while conducting business on behalf of Epic (other than
traffic violations or similar offenses);
o Any material breach of fiduciary duties owed to Epic;
o Refusal to perform the duties reasonably required by Epic;
o Unsatisfactory job performance;
o Any material misconduct in the course and scope of the employee's
employment with Epic, including dishonesty, disorderly conduct,
insubordination, harassment of other employees or customers or abuse
of alcohol or controlled substances, or
o The violation of any material provision of the employment agreement.
Epic has employment agreements with each managing director of Epic
Integrated. Each employment agreement provides that the director will be paid an
annual salary of $150,000 and that the employment agreement will continue in
effect until February 20, 2011 or the death or disability of the director,
whichever occurs first. However, either Epic or the director may terminate the
employment agreement earlier upon written notice. If the employment agreement is
terminated earlier by Epic without cause, then Epic will be required to pay the
director $150,000.
For purposes of the employment agreements, "cause" has the same meaning
as that term is used in Epic's employment agreements with the officers of the
Pearl Investment Company.
Long-Term Incentive Plans. Epic does not provide its officers or employees
with stock appreciation rights, long-term incentive or similar plans.
Employee Pension, Profit Sharing or other Retirement Plans. Epic does not
have a defined benefit, pension plan, profit sharing or other retirement plan,
although it may adopt one or more of such plans in the future.
38
Compensation of Directors During Year Ended December 31, 2007
Name Paid Stock Option
in Cash Awards (1) Awards (2) Total
- ---- ------- ---------- ---------- -----
Robert Eissler $500 --
Dr. Robert Ferguson $500 --
Kevin McMahon -- -- -- --
(1) The fair value of stock issued for services computed in accordance with FAS
123R on the date of grant.
(2) The fair value of options granted computed in accordance with FAS 123R on
the date of grant.
Mr. McMahon was not paid any director's fees in 2007 since he did not become a
director until July 2007.
Stock Option and Bonus Plans
Epic has adopted stock option and stock bonus plans. A summary description
of these plans follows. In some cases these Plans are collectively referred to
as the "Plans".
Incentive Stock Option Plan. Epic's Incentive Stock Option Plan authorizes
the issuance of shares of Epic's Common Stock to persons that exercise options
granted pursuant to the Plan. Only Company employees may be granted options
pursuant to the Incentive Stock Option Plan.
Non-Qualified Stock Option Plan. Epic's Non-Qualified Stock Option Plan
authorizes the issuance of shares of Epic's Common Stock to persons that
exercise options granted pursuant to the Plans. Epic's employees, directors,
officers, consultants and advisors are eligible to be granted options pursuant
to the Plans, provided however that bona fide services must be rendered by such
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction. The option
exercise price is determined by the Committee but cannot be less than the market
price of Epic's Common Stock on the date the option is granted.
Stock Bonus Plan. Epic's Stock Bonus Plan allows for the issuance of
shares of Common Stock to it's employees, directors, officers, consultants and
advisors. However bona fide services must be rendered by the consultants or
advisors and such services must not be in connection with the offer or sale of
securities in a capital-raising transaction.
Summary. The following is a summary, as of December 31, 2007, of the
options granted, or the shares issued, pursuant to the Plans. Each option
represents the right to purchase one share of Epic's common stock.
39
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
- ------------ ----------- ----------- ----------- ---------------
Incentive Stock
Option Plan 2,000,000 -- N/A 2,000,000
Non-Qualified
Stock Option Plan 3,000,000 1,611,000 N/A 1,389,000
Stock Bonus Plan 1,000,000 N/A 600,000 400,000
The following tables show, during the fiscal years ended December 31, 2006
and 2007, the options granted to and held by, the persons named below. All of
the options listed below were granted pursuant to Epic's Non-Qualified Stock
Option Plan.
Shares underlying
unexercised options which are:
----------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
Rex Doyle 100,000 $0.50 10/24/08
Rex Doyle 50,000 50,000 $3.00 10/24/08
John Ippolito 100,000 $0.50 10/24/08
John Ippolito 50,000 50,000 $3.00 10/24/08
David Reynolds 100,000 $0.50 10/24/08
David Reynolds 50,000 50,000 $3.00 10/24/08
Rex Doyle -- 292,000 $3.30 12/31/12
John Ippolito -- 182,000 $3.30 12/31/12
David Reynolds -- 143,000 $3.30 12/31/12
Michael Kinney -- 65,000 $3.17 7/10/12
W. Steven Goff -- 89,000 $3.30 12/13/12
Sherry L Herzig -- 46,000 $3.30 12/13/12
Lea Ann Robertson -- 46,000 $3.30 12/13/12
Carolyn N Stortstrom -- 46,000 $3.30 12/13/12
Gillian L Tilbury -- 46,000 $3.30 12/13/12
Rita L Williams -- 46,000 $3.30 12/13/12
Elizabeth Gallagher -- 10,000 $3.30 12/13/12
As of March 5, 2008 none of the options granted by Epic have been
exercised.
The following table shows the weighted average exercise price of the
outstanding options granted pursuant to Epic's stock option plans as of December
31, 2007. Epic's stock option plans were not approved by its shareholders.
Number of Securities
Number Remaining Available
of Securities For Future Issuance
to be Issued Weighted-Average Under Equity
Upon Exercise Exercise Price Compensation Plans,
of Outstanding of Outstanding Excluding Securities
Plan category Options (a) Options Reflected in Column (a)
- ------------- --------------- -------------- ----------------------
Incentive Stock
Option Plan -- -- 2,000,000
Non-Qualified Stock
Option Plan 1,611,000 $2.71 1,389,000
40
On December 13, 2007 Rex Doyle and John Ippolito were each awarded 300,000
shares of Epic's common stock pursuant to Epic's Stock Bonus Plan.
In connection with the December 2007 acquisition of the Pearl Investment
Company, R. Bret Rhinesmith received, in exchange for his shares of the Pearl
Investment Company, 1,000,000 shares of Epic's common stock and was appointed an
officer of Epic.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 4, 2006 Epic sold:
o 20,000,000 shares of its common stock to Rex Doyle for $200;
o 20,000,000 shares of its common stock to John Ippolito for $200;
o 2,000,000 shares of its common stock to David Reynolds for $20;
o 2,000,000 shares of its common stock to two unrelated parties for $20.
On March 12, 2007 Rex Doyle and John Ippolito each agreed to the
cancellation of 11,600,000 of their shares of Epic's common stock. Mr. Doyle and
Mr. Ippolito did not receive any consideration for the cancellation of their
shares.
PRINCIPAL SHAREHOLDERS.
The following table sets forth the number of and percentage of outstanding
shares of common stock owned by Epic's officers, directors and those
shareholders owning more than 5% of Epic's common stock as of February 29, 2008.
Shares of
Name and Address Common Stock (1) Percent of Class (2)
- ---------------- ---------------- ----------------------
Rex P. Doyle 8,600,000 19.6%
10655 Six Pines Drive, Suite 210
The Woodlands, TX 77380
John Ippolito 8,600,000 19.6%
10655 Six Pines Drive, Suite 210
The Woodlands, TX 77380
David Reynolds 2,200,000 5.0%
10655 Six Pines Drive, Suite 210
The Woodlands, TX 77380
R. Bret Rhinesmith 1,000,000 2.3%
7110 Jefferson Ave.
Lakewood, CO 80235
41
W. Robert Eissler 15,000 *
10655 Six Pines Drive, Suite 210
The Woodlands, TX 77380
Dr. Robert Ferguson 18,000 *
10655 Six Pines Drive, Suite 210
The Woodlands, TX 77380
Kevin G. McMahon -- --
717 Texas Avenue, Suite 1000
Houston, TX 77002
All Executive Officers 20,433,000 46.5%
and Directors as a group (7 persons)
* Less than 1%.
(1) Includes shares issuable upon the exercise of options, all of which are
presently exercisable, and held by the following persons:
Shares Issuable Upon
Name Exercise of Options
Rex Doyle 200,000
John Ippolito 200,000
David Reynolds 200,000
Except as listed in footnote (1) none of the persons listed in the
Principal Shareholders table hold any options, warrants or other securities
which are convertible into shares of Epic's common stock.
SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION
The owners of the common stock, notes and the warrants sold in the
December 2007 financing, are referred to in this prospectus as the "selling
shareholders". Epic will not receive any proceeds from the sale of the shares by
the selling shareholders. None of the selling shareholders held any position,
office or had any other material relationship with Epic or any of Epic's
affiliates during the past three years.
The names of and the shares to be sold by the selling shareholders are:
Shares Which
Shares of May be Share Which
Common Stock Acquired May be
Owned as of the Upon Received as
date of this Exercise of Payment of Total Shares Ownership
Name Prospectus Warrants (1) Principal (2) Offered After Offering
- ----- --------------- ------------- ------------- ------------ --------------
Chestnut Ridge Partners, LP 200,000 200,000 -- 400,000 --
Ironman PI Fund (QP), L.P. 500,000 500,000 -- 1,000,000 --
42
Truk Opportunity Fund, LLC 250,000 250,000 -- 500,000 --
Truk International Fund, LP 83,333 83,333 -- 166,666 --
Brio Capital L.P. 100,000 100,000 -- 200,000 --
GCA Strategic Investment
Fund Ltd. 333,333 333,333 -- 666,666 --
Cranshire Capital, L.P. 166,667 363,637 76,545 606,849 --
Midsummer Investment, Ltd. 500,000 4,045,455 1,377,780 5,923,235 --
Fort Mason Master, LP 469,550 2,134,319 646,935 3,250,804 --
Fort Mason Partners, LP 30,450 138,410 41,955 210,815 --
Fraser Black and
Deirdre D. Black 333,333 333,333 -- 666,666 --
Marcus Wilkins 100,000 100,000 -- 200,000 --
Robert R. Henry 130,000 130,000 -- 260,000 --
C. Allen Robinson 66,666 66,666 -- 133,332 --
Castex New Ventures, L.P. 666,667 666,667 -- 1,333,334 --
Roger S. Kellett 35,000 35,000 -- 70,000 --
Ricky D. Needham 22,000 22,000 -- 44,000 --
Thomas E. Palmer Jr. 20,000 20,000 -- 40,000 --
Thomas Edwin Palmer Sr. 33,334 33,334 -- 66,668 --
Terry P. Sellers 33,333 33,333 -- 66,666 --
Continental American
Resources, Inc. 33,333 33,333 -- 66,666 --
Morgan J. Scudi 40,000 40,000 -- 80,000 --
Albert G Aaron 66,667 66,667 -- 133,334 --
Edward Perera 76,001 76,001 -- 152,002 --
Warren W. Smith 66,667 66,667 -- 133,334 --
William Reed Moraw 50,000 50,000 -- 100,000 --
M. Richard Asher 466,667 466,667 -- 933,334 --
Susanne Young 66,667 66,667 -- 133,334 --
Steven Hahn 66,667 66,667 -- 133,334 --
Jeffrey Hahn 66,667 66,667 -- 133,334 --
43
Braden S. Carlsson 23,000 23,000 -- 46,000 --
Retzloff Family Company Ltd.,
LLLP 333,333 333,333 -- 666,666 --
Shelter Island Opportunity
Fund, LLC 787,879 306,170 1,094,049 --
William H. Wilson, Jr. 55,152 21,430 76,582 --
H. Steven Walton 39,394 15,310 54,704 --
Peter Morin 51,213 19,900 71,113 --
Todd M. Binet 51,513 19,900 71,113 --
Whitebox Convertible Arbitrage 4,333,334 1,683,950 6,017,284 --
Partners, LP
Pandora Select Partners, LP 2,363,637 918,520 3,282,157 --
Whitebox Special Opportunities 2,363,637 918,520 3,282,157 --
Partners Series B, LP
Guggenheim Portfolio Company 393,940 153,085 547,025 --
XXXI, LLC
Rodman & Renshaw (3) -- 1,301,151 -- 1,301,151 --
(1) Each warrant holder, with the exception of Rodman & Renshaw, is prohibited
from exercising the warrants to the extent that such exercise would result in
such holder, together with any affiliate of the warrant holder, beneficially
owning in excess of 4.999% of the outstanding shares of Epic's common stock
following such exercise. This restriction may be waived by each holder on not
less than 61 day's notice to Epic. However, the 4.999% limitation would not
prevent each warrant holder from acquiring and selling in excess of 4.999%
Epic's common stock through a series of acquisitions and sales under the
warrants so long as the warrant holder never beneficially owns more than
4.999% of Epic's common stock at any one time.
The number of shares issuable upon the exercise of the warrants is subject to
adjustment under those conditions explained in the section of the prospectus
entitled "Description of Securities - Notes and Warrants".
44
(2) At Epic's election, and under the conditions described in the section of the
prospectus captioned "Description of Securities", Epic may use shares of its
common stock to make principal payments on the notes. The number in the table
is an estimate and assumes that Epic makes all principal payment with shares
of its common stock having a price of $3.30 per share. The actual number of
shares which may be issued as payment of principal cannot be predicted at this
time and will depend upon a variety of factors, including the amount, if any
which Epic elects to pay with shares of its common stock and the future market
price of Epic's common stock and Epic's decision, or ability, to pay principal
with shares of its common stock. Epic may not use its common stock to pay
principal if the number of shares to be issued would result in the note holder
being the beneficial owner of more than 4.999% of Epic's outstanding shares.
The note holder may waive this restriction in the same manner as provided in
footnote(1) above.
The controlling person of each selling shareholders which is not an
individual is shown below:
Selling Shareholder Controlling Person
--------------------- ------------------
Chestnut Ridge Partners, LP Kenneth Holz
Ironman PI Fund (QP), L.P. G. Bryan Dutt
Truk Opportunity Fund, LLC Aaron Braxton
by: Atoll Asset Management, LLC
Truk International Fund, LP Aaron Braxton
by: Atoll Asset Management, LLC
Brio Capital L.P., 401 E. 34th Street Shaye Hirsch
GCA Strategic Investment Fund Ltd. Michael S. Brown
Cranshire Capital, L.P. Mitchell P. Kopin
Midsummer Investment, Ltd. Alisa Butchkowski
Fort Mason Master, LP Marshall Jensen or David Smolen
Fort Mason Partners, LP Marshall Jensen or David Smolen
Castex New Ventures, L.P. Alan G. Carnrite
Continental American Resources, Inc. Carl Suter
Retzloff Family Company Ltd., LLLP Mark A. Retzloff
Shelter Island Opportunity Fund, LLC Michael Fein
Whitebox Convertible Arbitrage
Partners, LP Jonathan Wood
Pandora Select Partners, LP Jonathan Wood
45
Whitebox Special Opportunities
Partners Series B, LP Jonathan Wood
Guggenheim Portfolio Company XXXI, LLC Jonathan Wood
Rodman & Renshaw (3) Thomas Pinou
(3) Rodman & Renshaw served as the lead placement agent in connection with the
sale of the shares of common stock, notes and warrants and received a cash fee
of $1,849,000 as well as warrants to purchase 1,301,151 shares of Epic's
common stock.
Manner of Sale.
The selling stockholders may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
46
The selling stockholders may sell shares of common stock short and deliver
shares of common stock covered by this prospectus to close out short positions
and to return borrowed shares in connection with such short sales.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved. Any
profits on the resale of shares of common stock by a broker-dealer acting as
principal might be deemed to be underwriting discounts or commissions under the
Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by a selling
stockholder. The selling stockholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the shares
if liabilities are imposed on that person under the Securities Act.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after Epic has filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus and may sell the shares of common stock from time to time under this
prospectus after Epic has filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares of common stock may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by the broker-dealers or agents
and any profit on the resale of the shares of common stock purchased by them may
be deemed to be underwriting commissions or discounts under the Securities Act.
Epic is required to pay all fees and expenses incident to the registration
of the shares of common stock. Epic has agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
The selling stockholders have advised Epic that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling stockholder. If Epic is notified by any
selling stockholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares of common stock, if required, Epic will
file a supplement to this prospectus. If the selling stockholders use this
prospectus for any sale of the shares of common stock, they will be subject to
the prospectus delivery requirements of the Securities Act.
47
The anti-manipulation rules of Regulation M under the Securities Exchange
Act of 1934 may apply to sales of Epic's common stock and activities of the
selling stockholders.
DESCRIPTION OF SECURITIES
Common Stock
Epic is authorized to issue 100,000,000 shares of common stock, (the
"common stock"). Holders of common stock are each entitled to cast one vote for
each share held of record on all matters presented to shareholders. Cumulative
voting is not allowed; hence, the holders of a majority of the outstanding
common stock can elect all directors.
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor and,
in the event of liquidation, to share pro rata in any distribution of Epic's
assets after payment of liabilities. The board is not obligated to declare a
dividend. It is not anticipated that dividends will be paid in the foreseeable
future.
Holders of common stock do not have preemptive rights to subscribe to
additional shares if issued by Epic. There are no conversion, redemption,
sinking fund or similar provisions regarding the common stock. All of the
outstanding shares of Common stock are fully paid and non-assessable.
Preferred Stock
Epic is authorized to issue up to 10,000,000 shares of preferred stock.
Epic's Articles of Incorporation provide that the Board of Directors has the
authority to divide the preferred stock into series and, within the limitations
provided by Colorado statute, to fix by resolution the voting power,
designations, preferences, and relative participation, special rights, and the
qualifications, limitations or restrictions of the shares of any series so
established. As the Board of Directors has authority to establish the terms of,
and to issue, the preferred stock without shareholder approval, the preferred
stock could be issued to defend against any attempted takeover of Epic.
Notes and Warrants
On December 5, 2007 Epic sold 4,406,334 shares of its common stock to a
group of private investors for gross proceeds of $6,609,500, or $1.50 per share.
The investors also received warrants which entitle the holders to purchase up to
4,406,334 shares of Epic's common stock. The warrants are exercisable at a price
of $1.50 per share and expire on December 5, 2012.
On December 31, 2007 Epic sold an additional 1,023,001 shares of its
common stock to a group of private investors for gross proceeds of $1,534,502 or
$1.50 per share. The investors also received warrants which entitle the holders
to purchase up to 1,023,001 shares of Epic's common stock. The warrants are
exercisable at a price of $1.50 per share and expire on December 5, 2012.
48
On December 5, 2007 Epic also sold notes in the principal amount of
$20,250,000 to a second group of private investors. The notes bear interest
annually at 10% per year. The notes are due and payable on December 5, 2012 and
are secured by liens on all of Epic's assets. The purchasers of the notes also
received warrants which entitle the holders to purchase up to 15,954,853 shares
of Epic's common stock. The warrants are exercisable at a price of $1.65 per
share and expire on December 5, 2012.
Interest on the notes is payable quarterly with the first interest payment
due on January 1, 2008. Beginning December 1, 2008 Epic is required to make
quarterly payments of $1,265,625 toward the principal amount of the notes. If
Epic fails to make any interest or principal payment when due, the notes will
become immediately due and payable.
At Epic's election, quarterly principal payments may be paid in Epic's
common stock. In the event Epic elects to pay principal in shares of its common
stock, the number of shares of common stock to be issued to each note holder
will be determined by dividing the amount to be paid by a price equal to 90% of
the average of Epic's VWAPs for the ten consecutive trading days prior to the
applicable payment date,
Epic may not use its common stock to pay principal unless each of the
following conditions is satisfied: (i) the number of authorized but unissued and
otherwise unreserved shares of common stock is sufficient for the issuance; (ii)
the shares of common stock to be issued in payment for principal and interest
may be sold by the holder pursuant to an effective registration statement
covering the shares or, in the alternative, all the shares may be sold pursuant
to Rule 144; (iii) Epic's common stock is listed (and is not suspended from
trading) on the OTC Bulletin Board; (iv) the number of shares to be issued would
not result in the note holder being the beneficial owner of more than 4.999% of
Epic's outstanding shares; (v) Epic is not in default with respect to any
material obligation in its agreements with the holders of the notes; (vi) no
public announcement of a proposed change in the control of Epic has occurred
that has not been consummated and (vii) the number of shares to be issued to all
note holders will not exceed an amount equal to 20% of the total dollar trading
volume of Epic's common stock over the twenty-two trading days immediately prior
to the date which is thirty trading days prior to the applicable payment date.
In the event that the consolidated cash and accounts receivable amounts
reported on any balance sheet included in any 10-Q, 10-QSB, 10-K or 10-KSB
report filed by Epic is less than 90% of Epic's consolidated cash and accounts
receivables on December 5, 2007 (the "Closing Current Assets Balance"), any note
holder will have the right to require Epic to redeem a portion of the holder's
note in cash, in an amount equal to the holder's pro-rata portion (based on the
then outstanding principal amounts of all outstanding notes) of the difference
between the Closing Current Asset Balance and Epic's consolidated cash and
accounts receivable.
49
If Epic sells any additional shares of common stock, or any securities
convertible into common stock at a price below the then applicable exercise
price of the warrants, the warrant exercise price will be lowered to the price
at which the shares were sold or the lowest price at which the securities are
convertible, as the case may be.
If the warrant exercise price is decreased, the number of shares of common
stock issuable upon the exercise of the warrant will be increased according to
the following formula:
WS x EP1 = NWS
---
EP2
Where:
WS = The number of shares issuable upon the exercise of warrants based
upon the exercise price prior to adjustment.
EP1 = The old exercise price of the warrants.
EP2 = The new exercise price of the warrants.
NWS = The number of shares of Epic's common stock issuable based upon the
new exercise price of the warrants.
The exercise price of the warrants, as well as the shares issuable upon
the exercise of the warrants, will also be proportionately adjusted in the event
of any stock splits.
However, neither the exercise price of the warrants nor the shares
issuable upon the exercise of the warrant will be adjusted as the result of
shares issued in connection with a Permitted Financing.
A Permitted Financing involves shares of common stock issued or sold:
o in connection with acquisitions, or other strategic transactions, the
primary purpose of which is not to raise cash;
o upon the exercise of options or the issuance of common stock to Epic's
employees, officers or directors, in accordance with Epic's stock
option, stock bonus or similar plans.;
Epic's agreements with the note holders provide that Epic may not:
o sell or issue any shares of its common stock or any securities
convertible into common stock until 90 days after the date of this
prospectus.
o issue options, warrants or securities convertible into Epic's common
stock unless the exercise or conversion price exceeds 130% of Epic's
average VWAPs for the five trading days prior to the issuance of the
security.
50
o issue securities convertible into common stock with a conversion price
or a number of shares issuable upon conversion that floats or is
subject to adjustment based upon the market price of Epic's common
stock.
o reverse split, forward stock split or reclassify its common stock.
o become obligated on any new debt with the exception of indebtedness
not exceeding $1,000,000 used to acquire capital assets;
o amend its articles of incorporation or bylaws in any manner that
adversely affects any rights of a note holder.
o purchase or otherwise acquire any of its capital stock other than a de
minimis number of shares or other than shares purchased from departing
officers and directors, provided that the purchase price does not
exceed $100,000 for all officers and directors;
o repay debt, other than debt which was outstanding on December 5, 2007.
o declare or pay any dividends (other than a stock dividend or stock
split) or make any
distributions to any holders of its common stock;
o enter into any transaction with any affiliate unless the transaction
is made on an arm's-length basis and approved by a majority of the
disinterested directors of Epic.
Any of the following are an event of default:
o Epic fails to make any interest or principal payment when due;
o Epic breaches any representation or warranty or covenant or defaults
in the timely performance of any other obligation in its agreement
with the note holders.
o Epic, or any of its major subsidiaries, files for protection from its
creditors under the federal bankruptcy code or a third party files an
involuntary bankruptcy petition against Epic or any of its major
subsidiaries.
o Epic, or any of its major subsidiaries, defaults in any of its
obligations under any other note or credit agreement or long term
lease in an amount exceeding $150,000, and the default continues for a
period of five days and results in the indebtedness becoming payable
prior to the date on which it would otherwise become payable;
o Epic's common stock is not listed on the OTC Bulletin Board or other
public trading market
o Epic is acquired by another company, or Epic agrees to sell in excess
of 33% of its assets in one transaction or series of related
transactions;
o a Change in Control occurs;
51
o the effectiveness of the Registration Statement, of which this
prospectus is a part, lapses for any reason
o the holders of the notes and warrants are not permitted to sell any
shares under the Registration Statement for twenty or more consecutive
trading days or thirty trading days (which need not be consecutive
trading days) in any twelve month period and the common stock issued
or issuable upon the conversion of the notes cannot be sold pursuant
to Rule 144;
o Epic fails for any reason to deliver a certificate within five trading
days after delivery of the certificate is required pursuant to any
agreement with the note holders;
o a judgment or judgments for the payment of money in excess of $50,000
are rendered against Epic and are not bonded, discharged or stayed
pending appeal within forty-five days after the entry of the judgment;
or
At any time after an event of default the interest rate on the notes will
increase to 18% per year, or the maximum rate permitted under applicable law,
and the note holders may require Epic to repurchase all or any portion of the
outstanding notes at a price equal to 130% of the outstanding principal, plus
all accrued but unpaid interest. So long as the notes are outstanding, the note
holders have a right to participate in any subsequent financings involving Epic.
Until June 5, 2008 the note holders have the option to purchase from Epic
notes in the principal amount of $10,125,000 plus warrants which would allow the
holders to purchase an additional 7,977,273 shares of Epic's common stock. The
additional notes and warrants, if purchased, will have the same terms and
provisions as the notes and warrants purchased by the note holders in December
2007.
For purposes of the notes:
The term "VWAP" means for any particular period the volume weighted
average trading price per share of Epic's common stock, and
A Change in Control is any transaction whereby any person acquires more
than 33% of Epic's voting securities, Epic merges into or consolidates with any
other company and after the transaction the stockholders of Epic immediately
prior to the transaction own less than 66% of the voting power of the successor
entity immediately after the transaction, Epic sells all or substantially all of
its assets and the stockholders of Epic immediately prior to the transaction own
less than 66% of the total voting power of the acquiring entity immediately
after the transaction or, the replacement within a three year period of more
than half of Epic's directors which is not approved by a majority of Epic's
directors holding office on December 5, 2007.
Epic has filed a registration statement, of which this prospectus is a
part, with the Securities and Exchange Commission in order that the shares of
common stock sold in the December 2007 financing as well as the shares which may
be issued in payment of the notes or upon the exercise of the warrants or may be
resold in the public market. If Epic's registration statement is not declared
effective by the Securities and Exchange Commission prior to April 4, 2008, Epic
will be required to pay the investors in the December 2007 financing $567,860
every 30 days until the registration statement is declared effective.
52
Rodman & Renshaw acted as the lead placement agent for the sale of the
common stock, notes and warrants. For its services in this regard, Rodman &
Renshaw received $1,849,000 in cash from Epic, as well as warrants to purchase
1,301,151 shares of Epic's common stock, plus $25,000 as reimbursement of its
legal expenses. Warrants to purchase 184,333 shares are exercisable at a price
of $1.50 per share and warrants to purchase 1,116,818 shares are exercisable at
a price of $1.65 per share. Epic paid $235,000 to other placement agents, none
of which were affiliated with Epic, participating in the financing.
Prior to the sale of the convertible notes and warrants, 8,882,502 shares
of Epic's common stock were owned by persons other than Epic's officers and
directors, the selling shareholders, and affiliates of the selling shareholders.
INFORMATION REGARDING POTENTIAL PROFIT THAT MAY BE REALIZED BY HOLDERS OF
CONVERTIBLE NOTES AND WARRANTS
Convertible Notes
- ------------------
Closing price of Epic's common stock on December 5, 2007,
the date the notes were sold $3.15
Number of shares of Epic's common stock which could be issued
to note holders in payment of principal, assuming the principal
amount of all notes are paid with shares of Epic's common stock.
The number of shares was determined by dividing $20,250,000 by
$2.835 which was 90% of closing price on December 5, 2007. 7,142,857
Total dollar value of 7,142,857 shares issuable in payment of
notes, based upon closing price of Epic's common stock on
December, 2007 $22,500,000
Potential profit to note holders, assuming all notes are
paid with shares common stock at a price of $2.835 per
share and then resold at a price of $3.15 per share. $2,250,000
Warrants
- --------
Number of warrants issued to:
Note holders: 15,945,545
Placement Agent: 1,116,818
Exercise price of warrants issued to Note holders
and Placement Agent $1.65
Number of shares of Epic's common stock which could be
issued to Note holders and placement agent, assuming all
warrants are exercised 17,062,363
Closing price of Epic's common stock on the date
the warrants were issued (December 5, 2007) $3.15
53
Total dollar value of shares issuable upon exercise of warrants,
based upon closing price of Epic's common stock on December 5,
2007 $53,746,443
Potential profit to warrant holders, assuming all 17,062,363
warrants issued to the Note holders and the Placement Agent
are exercised at a price of $1.65 per share and all shares
issuable upon the exercise of the warrants are resold at a
price of $3.15 per share. $25,593,543
Combined total potential profit to note and warrant holders:
A. Amount received by Epic from sale of notes: $20,250,000
B. Less placement agent fees (sale of notes only) (1,417,500)
C. Less placement agent expenses (25,000)
D. Less interest payable over term of notes (5,799,357)
E. Net proceeds to Epic from sale of notes $13,008,143
F. Combined total profit to holders of notes and warrants,
assuming notes are paid with shares of Epic's common
stock having a value of $2.835 per share, warrants to
purchase 17,062,363 shares are exercised at a price of $1.65
per share, and shares issuable in payment of the notes and
exercise of warrants are sold at a price of $3.15 per share,
which was the closing price of Epic's common stock on the
date the notes and warrants were sold. $27,843,543
Profit percentage:
B + D + F = $35,060,400 = 270%
------------- -----------
E
Average profit percentage over term of notes: 54%
Payments to Selling Shareholders and Finders
The notes bear interest at 10% per year. Beginning December 1, 2008 Epic is
required to make quarterly principal payments of $1,265,625. The notes are due
on December 5, 2012. Assuming:
o Epic makes all required quarterly principal payments,
o none of the notes are paid with shares of Epic's common stock, and
at maturity, the notes will have been paid in full and Epic will have paid
approximately $5,799,000 in interest during the term of the notes.
54
During the twelve months ending December 4, 2008 Epic will make mandatory
principal payments of $2,265,625 to the note holders and pay approximately
$2,002,000 in interest.
Epic will also be required to pay the holders of the notes and warrants
damages in the event Epic does not deliver certificates representing the common
stock issuable if the notes are paid with shares of Epic's common stock within
three trading days after any due date for the payment of the notes or, if the
warrants are exercised, within three trading days after the date the warrants
are exercised. The amount of any damages will depend upon:
o The number of shares delivered late,
o Number of trading days past the third trading day that the
certificates are delivered, and
o If, due to Epic's failure to timely deliver certificates, the amount
of any loss suffered by the note or warrant holders if they were
forced to buy Epic's common stock in the open market to settle trades.
The note holders will also be entitled to damages if this prospectus
cannot be used by the note holders for ten consecutive calendar days, or fifteen
calendar days, during any twelve-month period. The amount of damages will be
equal to 2% of the outstanding principal balance of the notes at the end of the
ten or fifteen day period, as the case may be.
Rodman & Renshaw acted as the lead placement agent for the sale of the
notes and warrants. For its services in this regard, Rodman & Renshaw received
$1,849,000 in cash from Epic, warrants to purchase 1,116,818 shares of Epic's
common stock plus $25,000 as reimbursement of its legal and other expenses. Epic
paid $235,000 to other placement agents, none of which were affiliated with
Epic, participating in the financing. The warrants issued to Rodman & Renshaw
are exercisable at a price of $1.65 per share
Rodman & Renshaw also received a cash commission and warrants for acting
as the lead placement agent for the sale of the common stock and warrants sold
by Epic in December 2007.
Warrants Held by Other Investors
See "Comparative Share Data" for information concerning the terms of
warrants held by investors other than those listed in the "Selling Shareholders"
section of this prospectus.
Transfer Agent
TranShare Corporation
5105 DTC Parkway, Suite 325
Greenwood Village, CO 80111
303-662-1112
303-662-1113 - Fax
55
LEGAL MATTERS
The validity of the securities offered by this prospectus has been passed
upon by Hart & Trinen, Denver, Colorado.
EXPERTS
Effective February 21, 2007 Epic replaced (i.e. dismissed) Comiskey &
Company with Malone & Bailey, P.C. as Epic's independent certified public
accountants. Comiskey & Company audited Epic's financial statements for the
fiscal years ended December 31, 2004 and 2005. During Epic's two most recent
fiscal years and subsequent interim period ended February 21, 2007, there were
no disagreements with Comiskey & Company on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Comiskey & Company
would have caused it to make reference to such disagreements in its report had a
reports.
During the two most recent fiscal years and subsequent interim period
ended February 21, 2007, Epic did not consult with Malone & Bailey regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
Epic's financial statements, or any matter that was the subject of a
disagreement or a reportable event as defined in the regulations of the
Securities and Exchange Commission.
The change in Epic's auditors was recommended and approved by the
directors of Epic.
The consolidated financial statements of Epic as of December 31, 2006 and
for the year ended December 31, 2006 included in this prospectus have been
audited by Malone & Bailey, an independent registered public accounting firm, as
stated in their report appearing elsewhere in this prospectus, and have been
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of Epic as of December 31, 2005 and for the year
ended December 31, 2005 included in this prospectus have been audited by
Comiskey & Company, an independent registered public accounting firm, as stated
in their report appearing elsewhere in this prospectus, and have been included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The financial statements of the Carnrite Group, LLC as of June 30, 2007
and for the period ended June 30, 2007, in this prospectus have been audited by
Malone & Bailey, an independent registered public accounting firm, as stated in
their report appearing elsewhere in this prospectus, and have been included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of Pearl Investment Company (formerly named Pearl
Development Company) as of December 31, 2006 and for each of the two years in
the period ended December 31, 2006, in this prospectus have been audited by
Ehrhardt Keefe Steiner & Hottman PC, an independent registered public accounting
firm, as stated in their report appearing elsewhere in this prospectus, and have
been included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
56
INDEMNIFICATION
Epic's bylaws authorize indemnification of a director, officer, employee
or agent of Epic against expenses incurred by him in connection with any action,
suit, or proceeding to which he is named a party by reason of his having acted
or served in such capacity, except for liabilities arising from his own
misconduct or negligence in performance of his duty. In addition, even a
director, officer, employee, or agent of Epic who was found liable for
misconduct or negligence in the performance of his duty may obtain such
indemnification if, in view of all the circumstances in the case, a court of
competent jurisdiction determines such person is fairly and reasonably entitled
to indemnification. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, or persons
controlling Epic pursuant to the foregoing provisions, Epic has been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ADDITIONAL INFORMATION
Epic is subject to the requirements of the Securities Exchange Act of l934
and is required to file reports, proxy statements and other information with the
Securities and Exchange Commission. Copies of any such reports, proxy statements
and other information filed by Epic can be read and copied at the Commission's
Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding Epic. The address of the SEC's website is http://www.sec.gov.
Epic has filed with the Securities and Exchange Commission a Registration
Statement under the Securities Act of l933, as amended, with respect to the
securities offered by this prospectus. This prospectus does not contain all of
the information set forth in the Registration Statement. For further information
with respect to Epic and such securities, reference is made to the Registration
Statement and to the exhibits filed with the Registration Statement. Statements
contained in this prospectus as to the contents of any contract or other
documents are summaries which are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement and related exhibits
may also be examined at the Commission's internet site.
57
EPIC ENERGY RESOURCES, INC.
DECEMBER 31, 2006
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Epic Energy Resources, Inc.
(a development stage company)
The Woodlands, Texas
We have audited the accompanying consolidated balance sheet of Epic Energy
Resources, Inc. as of December 31, 2006 and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the year then
ended and for the period from April 10, 2000 (inception) through December 31,
2006. The financial statements for the period April 10, 2000 (inception) through
December 31, 2005, were audited by other auditors whose reports expressed
unqualified opinions on those statements. The financial statements for the
period April 10, 2000 (inception) through December 31, 2005, include total
revenues and net loss of $0 and $98,312, respectively. Our opinion on the
statements of operations, stockholders' equity, and cash flows for the period
April 10, 2000 (inception) through December 31, 2006, insofar as it relates to
amounts for prior periods through December 31, 2005, is based solely on the
report of other auditors. These financial statements are the responsibility of
Epic's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Epic as of December 31, 2006
and the results of its operations and cash flows for the periods described above
in conformity with accounting principles generally accepted in the United States
of America.
MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas
April 16, 2007
Except for the removal of Note 3 (Going Concern) and the going concern paragraph
in our report, the date as to which is January 3, 2008.
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the balance sheet of Epic Energy Resources, Inc. (formerly San
Juan Financial, Inc.) (not presented) as of December 31, 2005, and the related
statements of operations, cash flows, and stockholders' equity (deficit) for the
year ended December 31, 2005, and for the period from inception (April 10, 2000)
to December 31, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Epic Energy Resources, Inc. as
of December 31, 2005, and the results of its operations, its cash flows, and its
changes in stockholders' equity for the year ended December 31, 2005, and for
the period from inception (April 10, 2000) to December 31, 2005, in conformity
with generally accepted accounting principles in the United States of America.
Denver, Colorado
April 3, 2006
/s/ COMISKEY & COMPANY
PROFESSIONAL CORPORATION
Certified Public Accountants & Consultants
789 Sherman Street - Suite 385 - Denver, CO 80203 (303)
830-2255 - Fax (303) 830-0876 - info@comiskey.com - www.comiskey.com
EPIC ENERGY RESOURCES INC
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
December 31, 2006
Assets
Current assets:
Cash and cash equivalents $ 590,172
Accounts receivable 4,600
Prepaid expenses and other current assets 120,219
----------
Total current assets 714,991
Oil and gas properties (full-cost method),
net of depletion
Proved developed 7,354,511
Unproved 60,000
Other mineral reserves 783,474
----------
Total assets $ 8,912,976
==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 97,630
Accrued liabilities 7,346
Current portion of long-term debt 872,990
------------
Total current liabilities 977,966
Long-term liabilities:
Asset Retirement Obligation 142,343
Long-term debt 1,707,676
------------
Total liabilities 2,827,985
------------
Stockholders' Equity
Preferred stock, no par value; 10,000,000
shares authorized; no shares issued and
Outstanding --
Common stock, no par value; 750,000,000
shares authorized; 53,441,061 shares
issued and outstanding at December 31, 2006 9,822,605
Additional paid-in capital 330,912
Deficit accumulated during development stage (4,068,526)
------------
Total stockholders' equity 6,084,991
------------
$ 8,912,976
============
See accompanying notes to consolidated financial statements.
F-3
EPIC ENERGY RESOURCES INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2006 and 2005 and Period from
April 10, 2000 (inception) through December 31, 2006
For the period
from inception
(April 10, 2000)
To December 31,
2006 2005 2006
---- ---- ---------------
Revenue from operations:
Oil & gas revenue $ 73,073 $ -- $ 73,073
Consulting revenue 33,190 -- 33,190
-------- -------- --------
Revenue from operations 106,263 -- 106,263
Cost of operations:
General and administrative expenses 926,301 20,000 1,024,613
Lease operating expense 59,460 -- 59,460
Depletion expense 30,814 -- 30,814
Accretion expense 725 -- 725
Impairment of oil and gas
properties 3,062,265 -- 3,062,265
--------- -------- ----------
Cost of operations 4,079,565 20,000 4,177,877
--------- -------- -----------
Loss from operations (3,973,302) (20,000) (4,071,614)
Other income (expense):
Interest and other income 3,519 -- 3,519
Interest expense (431) -- (431)
---------- --------- -----------
Net loss $(3,970,214) $ (20,000) $(4,068,526)
=========== ========= ===========
Loss per common share - Basic
and Diluted: $ (0.10) $ ($0.00)
========== ==========
Weighted average number of common
shares Outstanding 38,045,590 5,260,000
========== ===========
See accompanying notes to consolidated financial statements.
F-4
EPIC ENERGY RESOURCES INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from Inception (April 10, 2000) to December 31, 2006
Deficit
Accumulated
Additional During the Stockholders'
Common Stock Paid-in Development Equity
Shares Amount Capital Stage (Deficit)
------- ------ ---------- ------------ --------------
Issuance of common stock for
cash at $0.05 per share 1,260,000 $ 63,000 $ - $ - $ 63,000
Issuance of common stock no
consideration received 100,000,000 - - - -
Net loss for the period from
inception (April 10, 2000)
to December 31, 2000 - - - (56,711) (56,711)
------------ ---------- -------- ---------- ---------
Balance, December 31, 2000 101,260,000 63,000 - (56,711) 6,289
Cancellation of stock for
consideration not received (100,000,000) - - - -
Net loss for the year ended
December 31, 2001 - - - (5,825) (5,825)
------------ ---------- -------- ---------- ---------
Balance, December 31, 2001 1,260,000 63,000 - (62,536) 464
Net loss for the year ended
December 31, 2002 - - - (464) (464)
------------ ---------- -------- ---------- ---------
Balance, December 31, 2002 1,260,000 63,000 - (63,000) -
Net loss for the year ended
December 31, 2002 - - - - -
------------ ---------- -------- ---------- ---------
Balance, December 31, 2003 1,260,000 63,000 - (63,000) -
The accompanying notes are an integral part of the financial statements.
F-5
EPIC ENERGY RESOURCES INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
CONTINUED
For the Period From Inception (April 10, 2000) to December 31, 2006
Deficit
Accumulated
Additional During the Stockholders'
Common Stock Paid-in Development Equity
Shares Amount Capital Stage (Deficit)
------- ------ ---------- ------------ --------------
Shares issued for compensation 4,000,000 5,000 - - 5,000
Expenses paid by shareholders - - 9,305 - 9,305
Net loss for the year ended
December 31, 2003 - - - (15,312) (20,000)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 5,260,000 68,000 9,305 (78,312) (1,007)
Expenses paid by shareholders - - 17,386 - 17,386
Net loss for the year ended
December 31, 2005 - - - (20,000) (20,000)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 5,260,000 $ 68,000 $ 26,691 $ (98,312) $ (3,621)
Shares issued for cash 44,902,755 903,195 - - 903,195
Shares issued for services 75,000 57,094 - - 57,094
Shares issued for Oil and Gas
property (Kansas field) 3,200,000 8,480,000 - - 8,490,000
Shares issued for un-proved
properties (Oklahoma) 3,846 10,000 - - 10,000
Expenses paid by shareholders - - 304,221 - 304,221
SFAS 123R stock option expense - 304,316 - - 304,316
Net loss for the year ended
December 31, 2006 - - - (3,970,214) (3,970,214)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2006 53,441,601 $ 9,822,605 $ 330,912 $(4,068,526) $6,084,991
============ ============ ============ ============ ============
F-6
See accompanying notes to consolidated financial statements.
EPIC ENERGY RESOURCES INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006 and 2005 and For the
period from April 10, 2000(inception) through December 31, 2006
For the period
For the year For the year from inception
ended ended (April 10, 2000)
December 31, December 31, to December 31,
2006 2005 2006
------------- ------------ ---------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(3,970,214) $ (20,000) $ (4,068,526)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depletion 30,814 - 30,814
Impairment of oil and gas
Properties 3,062,265 - 3,062,265
Accretion of ARO 725 - 725
Shares issued for compensation 361,410 - 366,410
Changes in operating assets
and liabilities:
Accounts payable 44,012 2,614 47,633
Accounts receivable (4,600) - (4,600)
Prepaid expenses (120,219) - (120,219)
------------ ------------ ---------------
Net cash flows from operating
activities (595,807) (17,386) (685,498)
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisition of properties (102,100) - (102,100)
------------ ------------ ----------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Debt service (24,089) - (24,089)
Proceeds from debt 104,752 - 104,752
Proceeds from the issuance
of common stock 903,195 - 966,195
Capital donated by shareholders 304,221 17,386 330,912
------------ ------------ ----------------
Net cash flows from financing
activities 1,288,079 17,386 1,377,770
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 590,172 - 590,172
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD - - -
------------ ------------ ----------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 590,172 $ - $ 590,172
============ ============ ================
Additional cash flow disclosures:
Non-cash investing and financing
activities:
Oil and gas properties acquired
with stock $8,480,000 -
Note payable for Oil and
Gas properties $1,707,673 -
See accompanying notes to consolidated financial statements.
F-7
EPIC ENERGY RESOURCES INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations
Background
San Juan Financial, Inc. was incorporated under the laws of Colorado on
June 6, 1989. Following incorporation, San Juan remained an inactive shell
company. Effective April 10, 2000, San Juan entered the development stage in
accordance with SFAS No. 7. San Juan's principal activities since April 10, 2000
have consisted of organizational matters and the sale of its no par value common
stock. This changed in April 2006 when the name changed to Epic Capital Group
Inc. During this time, Epic refocused its business plan to oil and gas
activities. On April 4, 2006, Epic signed an agreement for the sale of
44,000,000 shares of common stock to five individuals for an aggregate price of
$440. Mark W. Moniak, Epic's President and only director, appointed Rex Doyle,
John Ippolito and David Reynolds as directors of Epic. Following these
appointments Mr. Moniak, resigned as an officer and director of Epic. Epic's new
directors then appointed the following persons to be officers of Epic:
Name Position
---- --------
Rex Doyle Chief Executive and Principal Financial Officer
John Ippolito President
David Reynolds Executive Vice President and Secretary
Amendment to Articles
On April 10, 2000, San Juan filed amended articles of incorporation with
the State of Colorado, at which time San Juan revised Article XI, Board of
Directors. The Board consists of one director who is also the President of San
Juan. On September 15, 2004, Troy Fullmer, Epic's only officer and director,
appointed Mark W. Moniak as a director of Epic and as Epic's President and Chief
Executive Officer. Following the appointment of Mr. Moniak, Mr. Fullmer resigned
as an officer and director Epic. Mr. Moniak resigned as an officer and director
of Epic on April 4, 2006.
Operations
Epic is engaged primarily in the acquisition, exploration, development,
production, and sales of, oil, gas and natural gas liquids.
The shareholders of Epic approved an amendment to Epic's Articles of
Incorporation in May 2006 which changed the name of the corporation from San
Juan Financial Inc. to Epic Capital Group Inc. In December 2006 the shareholders
approved an amendment to change the name of the corporation from Epic Capital
Group Inc. to Epic Energy Resources Inc. (Epic)
F-8
2. Summary of Significant Accounting Policies
Development Stage Activities
Epic Energy Resources Inc. entered the development stage in accordance
with Financial Accounting Standards Board Statements of Financial Accounting
Standards (SFAS) No. 7, "Accounting and Reporting by Development Stage
Enterprises" in 2000, upon commencement of activities. Epic's original business
plan was to operate as a mortgage banking and brokerage company over the
Internet. In 2006, Epic changed its focus to that of an oil and gas company.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments, including cash, receivables, accounts payable, and
notes payable are carried at amounts which reasonably approximate their fair
value due to the short-term nature of these amounts.
Credit Risk and Concentrations
Epic does not require collateral from its customers with respect to
accounts receivable but performs periodic credit evaluations of such customer's
financial conditions. Epic determines any required allowance by considering a
number of factors including lengths of time accounts receivable are past due and
Epic's previous loss history. Epic provides an allowance to reserve for accounts
receivable when they become uncollectible. As of December 31, 2006 and 2005,
Epic has determined that no allowance for doubtful accounts is required.
Cash Equivalents
Epic considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue recognition
Epic records oil and gas revenues following the entitlement method of
accounting for production, in which any excess amount received above Epic's
share is treated as a liability. If less than Epic's share is received, the
underproduction is treated as an asset. Epic did not have an imbalance position
in terms of volumes or values at December 31, 2006.
Proceeds from the sale or disposition of oil and gas properties are
accounted for as a reduction to capitalized costs, unless a significant portion
of Epic's proved reserve quantities in a particular cost center are sold
(greater than 25 percent), in which case a gain or loss is recognized.
F-9
Oil and gas properties
Epic follows the full cost accounting method to account for the costs
incurred in the acquisition, exploration, development and production of oil and
gas reserves. Under this method, all costs, including internal costs directly
related to acquisition, exploration and development activities are capitalizable
as oil and gas property costs. Properties not subject to amortization consist of
exploration and development costs which are evaluated on a property-by-property
basis. Amortization of these unproved property costs begins when the properties
become proved or their values become impaired. Epic assesses the realizability
of unproved properties on at least an annual basis or when there has been an
indication that an impairment in value may have occurred. Impairment of unproved
properties is assessed based on management's intention with regard to future
exploration and development of individually significant properties and the
ability of Epic to obtain funds to finance such exploration and development. If
the results of an assessment indicate that the properties are impaired, the
amount of the impairment is added to the capitalized costs to be amortized.
There was no impairment of unproved properties during the years ended December
31, 2006 and 2005.
On the sale or retirement of a complete unit of proved property, the cost
and related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
The fair value of an asset retirement obligation is recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The present value of the estimated asset retirement costs is capitalized
as part of the carrying amount of the long-lived asset. For Epic, asset
retirement obligations relate to the abandonment of oil and gas producing
facilities. The amounts recognized are based upon numerous estimates and
assumptions, including future retirement costs, future recoverable quantities of
oil and gas, future inflation rates and the credit-adjusted risk-free interest
rate.
Costs of oil and gas properties are amortized using the units of
production method. Depletion expense per equivalent physical unit of production
amounted to $30,814 and $ 0, for the years ended December 31, 2006 and 2005,
respectively.
Under full cost accounting rules for each cost center, capitalized costs
of proved properties, less accumulated amortization and related deferred income
taxes, shall not exceed an amount (the "cost ceiling") equal to the sum of (a)
the present value of future net cash flows from estimated production of proved
oil and gas reserves, based on current economic and operating condition,
discounted at 10 percent, plus (b) the cost of properties not being amortized,
plus (c) the lower of cost or estimated fair value of any unproved properties
included in the costs being amortized, less (d) any income tax effects related
to differences between the book and tax basis of the properties involved. If
capitalized costs exceed this limit, the excess is charged as an impairment
expense. During the year ended December 31, 2006, the Company incurred a proved
property impairment expense of $3,062,265 which is reflected in the accompanying
Consolidated Statement of Operations.
Other mineral reserves
Helium is a gas produced as part of the production stream from our oil and
gas properties in Kansas. Helium is a byproduct of the production process. We
have estimated that the net recoverable amount of helium is approximately
$783,474.
Long-lived assets
Long-lived assets to be held and used or disposed of other than by sale
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. When required, impairment
F-10
losses on assets to be held and used or disposed of other than by sale are
recognized based on the fair value of the asset. Long-lived assets to be
disposed of by sale are reported at the lower of the asset's carrying amount or
fair value less cost to sell.
Income Taxes
Epic uses the liability method in accounting for income taxes. Deferred
tax assets and liabilities are recognized for temporary differences between
financial statement carrying amounts and the tax bases of assets and
liabilities, and are measured using the tax rates expected to be in effect when
the differences reverse. Deferred tax assets are also recognized for operating
loss and tax credit carry forwards. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation allowance is used to
reduce deferred tax assets when uncertainty exists regarding their realization.
Loss per Common Share
Basic and diluted net loss per share calculations are calculated on the
basis of the weighted average number of common shares outstanding during the
year. The per share amounts include the dilutive effect of common stock
equivalents in years with net income. Basic and diluted loss per share is the
same due to the absence of common stock equivalents as all potential common
stock equivalents are anti-dilutive.
Stock-based compensation
In 2006, Epic began issuing options to purchase common stock to employees
as compensation. Epic records as compensation expense the fair value of such
shares as calculated pursuant to Statement of Financial Accounting Standard No.
123R, Accounting for Stock-Based Compensation ("SFAS No. 123R"), recognized over
the related requisite service period. Epic accounts for stock-based compensation
issued to non-employees in accordance with the provisions of SFAS No. 123R and
EITF No. 96-18, "Accounting for Equity Instruments That Are Issued to
Non-Employees for Acquiring, or in Conjunction with Selling Goods or Services".
For accounting purposes, the value of common stock issued to non-employees and
consultants is determined based on the fair value of the services received or
the fair value of the equity instruments issued, whichever value it more
reliably measurable. Epic utilizes a standard option pricing model, the
Black-Scholes model, to measure the fair value of stock options granted.
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following at
December 31, 2006.
Workers' Compensation & Liability Insurance $86,886
Directors' and Officers' Insurance 33,333
--------
Total $120,219
========
4. Acquisition of Oil and Gas Properties
In December 2006 Epic acquired a 100% working interest
(approximately 82% net revenue interest) in 28,600 acres in Rush County, Kansas.
Located on the acreage were 58 producing gas wells with total proved reserves at
December 31, 2006 of 3,717 barrels of oil and 2,793,000 Mcf of gas.
F-11
The acreage and wells were acquired for $100,000 in cash, a $2,500,000 loan
from the sellers of the property and 3,200,000 shares of Epic's common stock
valued at $8,480,000 using the closing price of Epic's common stock at the
inception of the agreement. The $2,500,000 loan bears interest at 10% per year
and is payable in 42 equal monthly installments of $72,000.
In December 2006 Epic acquired a 50% working interest (approximate 40% net
revenue interest) in 6,000 acres in Kay County, Oklahoma. Located on the leased
acreage were one producing gas well and six shut-in gas wells. Epic estimated
that it will cost approximately $7,000 (with Epic being responsible for its 50%
share) to rework each shut-in well and place the wells back on production. Epic
plans to begin reworking the six shut-in wells in the next few months. For its
interest in this prospect, Epic paid $50,000 in cash and issued 3,846 shares of
its common stock to the sellers valued at $10,000 using the closing price of
Epic's common stock at the inception of the agreement. 5. Other Mineral Reserves
Our proved oil and gas properties in Rush County, Kansas contain a Helium
reserve estimated between 1% and 2% of our proved gas reserves of the property.
Our engineers engaged to perform an analysis of our Oil and Gas reserves
estimate that our average proved Helium reserve gross of extraction costs is
approximately $1,566,947. We are currently in negotiations with a third party
that would extract our Helium reserves for a cost of approximately half of our
estimated a reserve. As a result we have stated our net other mineral reserves
at an estimated net value of $783,474 at December 31, 2006.
6. Asset Retirement Obligations
Epic records depreciation of the capitalized asset retirement cost and
accretion of the asset retirement obligation over time. The depreciation will
generally be determined on a straight line basis, while the accretion to be
recognized will escalate over the life of the producing assets, typically as
production declines. The following table indicates the changes to Epic's ARO
account:
Balance at December 31, 2005 $0
Liabilities Incurred $148,964
Accretion Expense 725
------------
Balance at December 31, 2006 $149,689
Current asset retirement obligation $ 7,346
Long-term asset retirement obligation $142,343
--------
$149,689
7. Long-Term Debt
In December 2006, Epic borrowed $2,500,000 secured by the Rush County
Kansas property. The note is for a term of 42 months pursuant to 10% interest.
The monthly principal and interest payment of this note is approximately
$71,000.
If the cash flow from the property is less than the monthly principal and
interest payment, the deficit is added to the principal amount of the note. If
the cash flow from the property is greater than the monthly principal and
interest, the additional amount reduces the principal of the note.
Long-term debt at December 31, 2006 consists of the following:
Note payable secured by property acquired $2,486,386
Note payable General Liability Insurance 65,480
Note payable Director & Officers Insurance 28,800
Less current maturities (872,990)
------------
$1,707,676
============
F-12
The long-term debt is scheduled to mature as follows, subject to
production payments:
Year ending
December 31st, Amount
-------------- ---------
2007 $872,990
2008 849,504
2009 849,504
2010 8,668
2011 -
Thereafter -
-------------
2,580,666
Less: current portion of long-term debt (872,990)
-------------
Total long-term debt, net of current
maturities $1,707,676
=============
8. Stockholders' Equity
Following its original incorporation in June 1989, Epic had issued
100,000,000 shares of its no par value common stock to an officer as payment for
services related to the organization and start-up of the Company. The value of
the transaction could not be objectively measured as a related party rendered
the services. The transaction has been recorded at no value since the Board of
Directors determined that the rendered services for which these shares had been
issued were incomplete. On November 2, 2001, the Board of Directors authorized
the cancellation of the original 100,000,000 shares of common stock, as a result
of the incomplete performance.
On April 7, 2000, the Board of Directors authorized a 1-to-8 reverse split
of Epic's no par value common stock, effective on that date. All share and per
share amounts reflect this reverse split.
In May 2000, Epic conducted a private placement offering whereby it sold
1,260,000 shares of its no par value common stock for $0.05 per share pursuant
to an exemption from registration claimed under Sections 4(2) and 4(6) of the
Securities Act of 1933, as amended, and Regulation D promulgated hereunder. Epic
received net proceeds of $63,000.
On September 15, 2004, Mark W. Moniak was appointed as Director,
President, and Chief Executive Officer of Epic. Epic does not have an employment
agreement with Mr. Moniak. Epic issued 4,000,000 shares of its common stock,
valued at $5,000, to Mr. Moniak in return for Mr. Moniak serving as Epic's
President until September 15, 2005.
During the year ended December 31, 2004, Epic incurred $9,305 of expenses
which were paid by stockholders and recorded as additional paid-in capital.
On March 11, 2005, Epic held a special meeting of its shareholders. At
this meeting, the shareholders of Epic held a 20-for-1 forward stock split of
Epic's common stock. All share and per share data has been retroactively
restated to reflect this forward stock split.
During the year ended December 31, 2005, Epic incurred $17,386 of expenses
which were paid by stockholders and recorded as additional paid-in capital.
On April 4, 2006, Epic signed an agreement for the sale of 44,000,000
shares of common stock to five individuals for an aggregate price of $440. Mark
W. Moniak, Epic's President and only director, appointed Rex Doyle, John
Ippolito and David Reynolds as directors of Epic. Following these appointments
Mr. Moniak, resigned as an officer and director of Epic. Epic's new directors
then appointed the following persons to be officers of Epic:
F-13
Name Position
---- --------
Rex Doyle Chief Executive and Principal Financial Officer
John Ippolito President
David Reynolds Executive Vice President and Secretary
In addition to the shares issued for cash stated above, 902,755 shares of
stock were issued in a private offering in December 2006. The total cash
received was $902,755. There were no registration rights penalties associated
with this issuance. The shares issued were restricted shares in accordance with
SEC section 144.
In December 2006, 45,000 shares of common stock were issued to directors
for services rendered and for services to be rendered over the next 12 months.
The fair market value using the closing price of the Epic's stock on the
measurement date was $65,254 of which $13,594 has been recorded as compensation
expense. 30,000 shares of common stock were issued to key employees for services
previously rendered. The fair market value of the services rendered for the
common stock was approximately $43,500 using the closing price of Epic's stock
on the measurement date and is included as component of compensation expense.
In December 2006, 3,200,000 shares of stock were issued to purchase proved
oil and gas properties in Rush County, Kansas. Based upon the closing price of
Epic's stock on the effective date of the purchase agreement, the value was
$8,480,000. Additionally, 3,846 shares were issued in December 2006 for
un-proved oil and gas properties in Oklahoma. The value of the stock at the time
of purchase was $10,000 based upon the closing price of Epic's stock on the
agreement effective date.
In April 2006 several shareholders loaned Epic $300,000. The loans were
unsecured, did not bear interest and were to be cancelled at such time as Epic's
common stock became eligible for listing on the OTC Bulletin Board. In September
2006 Epic's common stock was listed on the OTC Bulletin Board, the loans were
cancelled, and the $300,000 liability was reclassified as additional paid-in
capital.
9. Income Taxes
During 2006 and 2005, EPIC incurred net losses and, therefore, had no tax
liability. The net deferred tax asset generated by the loss carry-forward has
been fully reserved. The cumulative net operating loss carry-forward is
approximately $645,000 at December 31, 2006, and will expire in the years 2019
through 2026.
At December 31, 2006, deferred tax assets consisted of the following:
Deferred tax assets
Net operating losses $225,700
Less: valuation allowance (225,700)
----------
Net deferred tax asset $ 0
==========
10. Commitments and Contingencies
Epic is not currently involved in any pending legal proceedings. In the
future, Epic may become involved in various legal proceedings from time to time,
either as a plaintiff or as a defendant. and either in or outside the normal
course of business. Epic is not now in the position to determine when, if ever,
such legal proceedings may arise. If Epic becomes involved in legal proceedings,
Epic's financial condition, operations, or cash flows could be materially
adversely affected, depending on the facts and circumstances related to such
proceedings.
11. Lease Agreement
Our executive offices are located in The Woodlands, Texas, in a leased
facility consisting of approximately 1,500 square feet requiring lease payments
of $2,400 per month. The lease for our offices expires on December 31, 2006,
however we can extend the lease for a subsequent period of 12 months at that
time. All of our facilities are in good repair.
F-14
12. Stock Options and Warrants
There were no stock options issued or outstanding prior to 2006. A summary
of changes in outstanding options is as follows:
Weighted Weighted
Average Average
Options Share Price
Outstanding at December 31, 2005 -- --
Changes during the year:
Granted 600,000 $1.75
Exercised -- --
Forfeited -- --
------------ ----------
Outstanding at December 31, 2006 600,000 $1.75
Options outstanding and exercisable as of December 31, 2006:
Exercisable
Outstanding Remaining
Exercise Price Life Number of Shares
-------------- ------- ----------------
$ .50 2 years 300,000
$3.00 2 years 300,000
Epic has determined, based upon the Black-Scholes model, that the fair
value of the warrants on the date of grant was approximately $335,619, using an
expected life of two years, volatility of 47% and a risk-free interest rate of
4.9%.
A summary of warrant activity for 2006 is as follows:
Number of Warrants Weighted
Outstanding and Average Exercise
Exercisable Price
------------------ ----------------
Outstanding, December 31, 2005 - $ -
Granted 897,100 2.25
----------
Outstanding, December 31, 2006 897,100 $ 2.25
==========
As of December 31, 2006, the range of warrant prices for shares under
warrants and the weighted average remaining contractual life is as follows:
Weighted Average
Remaining
Exercise Number of Contractual Life
Price Warrants (in months)
-------- --------- -----------------
Series A Warrants $ 2.00 212,500 12.0
Series B Warrants 2.50 684,600 33.5
---------
897,100
F-15
13. Subsequent Events
On March 12, 2007 Rex Doyle (Chief Executive Officer) and John Ippolito
(President) surrendered to the Company a total of 23,200,000 shares of common
stock. This action was taken in order to place the Company in a favorable
position to attract the equity and debt financing required to continue to
execute its business plan.
In January 2007 the Rush County gas wells were shut in due to the closure
of the plant which was purchasing the gas produced from Epic's wells. Epic does
not know if the plant will reopen and is currently looking for an alternate
buyer for the gas. The acreage and wells were acquired for $100,000 in cash, a
$2,500,000 loan from the sellers of the prospect and 3,100,000 shares of Epic's
common stock. The $2,500,000 loan bears interest at 10% per year and is payable
in 42 equal monthly installments of $72,000.
In August 2007 the Company acquired the Carnrite Group, LLC for 3,177,812
shares of its common stock.
In December 2007 the Company acquired Pearl Investment Company (formerly
named Pearl Development Company) for 1,486,240 shares of its common stock and
$18,720,000 in cash.
The Carnrite Group and Pearl Investment Company provide consulting
services to the oil, gas and energy industry in the areas of engineering,
construction management, operations, maintenance and oilfield project
management.
On December 5, 2007 the Company sold 4,406,334 shares of its common stock
to a group of private investors for gross proceeds of $6,609,500, or $1.50 per
share. The investors also received warrants which entitle the holders to
purchase up to 4,406,334 shares of the Company's common stock. The warrants are
exercisable at a price of $1.50 per share and expire on December 5, 2012.
On December 31, 2007 the Company sold an additional 1,023,001 shares of
its common stock to a group of private investors for gross proceeds of
$1,534,502 or $1.50 per share. The investors also received warrants which
entitle the holders to purchase up to 1,023,001 shares of the Company's common
stock. The warrants are exercisable at a price of $1.50 per share and expire on
December 5, 2012.
On December 5, 2007 the Company also sold notes in the principal amount of
$20,250,000 to a second group of private investors. The notes bear interest
annually at 10% per year. The notes are due and payable on December 5, 2012 and
are secured by liens on all of the Company's assets. The purchasers of the notes
also received warrants which entitle the holders to purchase up to 15,954,545
shares of the Company's common stock. The warrants are exercisable at a price of
$1.65 per share and expire on December 5, 2012.
Interest on the notes is payable quarterly with the first interest payment
due on January 1, 2008. Beginning December 1, 2008 the Company is required to
make quarterly payments of $1,265,625 toward the principal amount of the notes.
SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
All of our operations are directly related to oil and gas producing
activities located in Kansas and Oklahoma; we did not own or participate in any
oil and gas properties prior to January 1, 2006.
Capitalized Costs Relating to Oil and Gas Producing Activities
December 31, 2006
Proved oil and gas properties $ 10,447,590
Unproved oil and gas properties 60,000
---------------
Total capitalized costs 10,507,590
Less impairment allowance (3,062,265)
F-16
Less accumulated depreciation and
amortization (30,814)
---------------
Net Capitalized Costs $ 7,414,511
===============
Costs Incurred in Oil and Gas Producing Activities
For the Fiscal Years Ended December 31, 2006
Acquisition of proved properties $10,296,526
Acquisition of unproved properties 60,000
Development costs 2,100
Exploration costs - Asset retirement costs
recognized according to SFAS No. 143 148,964
--------------
Total Costs Incurred $ 10,507,590
==============
Results of Operations from Oil and Gas Producing Activities
For the Fiscal Years Ended December 31, 2006
Oil and gas revenues $ 73,073
Production costs and taxes (59,460)
Depreciation and amortization and ARO accretion (31,539)
-----------
Results of operations before income taxes (17,926)
Provision for income taxes --
-----------
Results of Oil and Gas Producing Operations $ (17,926)
===========
The Company has presented the reserve estimates utilizing an oil price of
$56.32 per Bbl and a natural gas price of $5.02 per Mcf as of December 31, 2006.
Information for oil is presented in barrels (Bbl) and for natural gas in
thousands of cubic feet (Mcf).
There are many inherent uncertainties in estimating proved reserve
quantities, projecting future production rates, and timing of development
expenditures. Accordingly, these estimates are likely to change as future
information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude oil
and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
those reserves expected to be recovered through existing wells, with existing
equipment and operating methods.
A summary of changes in proved reserve balances is presented below:
Total Proved Proved Developed
------------ ----------------
BBL MCF BBL MCF
--- --- --- ---
Reserves as of January 1,
2006 - - - -
Purchase of reserves in
place 3,717 4,985,197 3,717 2,793,010
Sale of reserves in place - - - -
Extensions and discoveries - - - -
Revisions of previous estimates - - - -
Production - (14,879) - (14,879)
------- ----------- ------- ----------
Reserves as of December 31,
2006 3,717 4,970,318 3,717 2,778,131
======= =========== ======= ==========
The following is a standardized measure of the discounted net future cash
flows and changes applicable to proved oil and natural gas reserves required by
Statement of Financial Accounting Standards No. 69, Disclosures about Oil and
F-17
Gas Producing Activities (SFAS No. 69). The future cash flows are based on
estimated oil and natural gas reserves utilizing prices and costs in effect as
of year end, discounted at 10% per year and assuming continuation of existing
economic conditions.
The standardized measure of discounted future net cash flows is based upon
imprecise estimates of quantities and rates of production of reserves. Revisions
of previous year estimates can have a significant impact on these results. Also,
exploration costs in one year may lead to significant discoveries in later years
and may significantly change previous estimates of proved reserves and their
valuation. Therefore, the standardized measure of discounted future net cash
flow is not necessarily indicative of the fair value of the Company's proved oil
and natural gas properties.
Future income taxes are based on year-end statutory rates, adjusted for
net operating loss carry forwards and tax credits. A discount factor of 10% was
used to reflect the timing of future net cash flows. The Standardized Measure of
Discounted Future Net Cash Flows is not intended to represent the replacement
cost or fair market value of the Company's oil and natural gas properties.
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
December 31, 2006
-----------------
Future cash inflows $ 25,156,646
Future costs:
Production and development costs (9,993,835)
Future income taxes (1,807,558)
-----------
Future net cash flows 13,355,253
10% annual discount for estimated timing of
cash flows (6,000,742)
-----------
Standardized measure of discounted future net
cash flows $ 7,354,511
=============
F-18
EPIC ENERGY RESOURCES, INC.
FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 2007
(Unaudited)
EPIC ENERGY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2007 2006
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 700,909 $ 590,172
Accounts receivable:
Billed, net of allowance of $0 1,454,062 4,600
Unbilled, at estimated net realizable value 330,597 -
Accounts receivable from affiliates 5,000 -
Prepaid expenses and other 16,250 120,219
------------ ---------
TOTAL CURRENT ASSETS 2,506,818 714,991
Oil and gas properties (full-cost method),
net of accumulated depreciation, depletion,
amortization and impairment
Proved 6,075,984 7,354,511
Unproved - 60,000
Other mineral reserves 783,474 783,474
Property and equipment, net 27,473 -
Investment in joint venture 22,700 -
Other assets 304,902 -
Goodwill 9,967,252 -
------------ ---------
TOTAL ASSETS $ 19,688,603 $ 8,912,976
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 418,998 $ 97,630
Accrued liabilities 375,937 7,346
Current portion of long term debt 849,505 872,990
Line of credit 362,000 -
------------ ---------
TOTAL CURRENT LIABILITIES 2,006,440 977,966
Asset retirement obligations 151,555 142,343
Long-term debt . 1,830,658 1,707,676
------------ ---------
TOTAL LIABILITIES 3,988,653 2,827,985
STOCKHOLDERS' EQUITY
Common stock, no par value: 100,000,000
authorized:
36,939,586 and 53,441,601 shares issued
and outstanding at September 30, 2007 and
December 31, 2006, respectively 21,318,341 9,822,605
Additional paid-in capital 331,412 330,912
Accumulated deficit (5,949,803) (4,068,526)
------------ ---------
TOTAL STOCKHOLDERS EQUITY 15,699,950 6,084,991
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,688,603 $ 8,912,976
============= ===========
See accompanying notes to consolidated financial statements.
F-19
EPIC ENERGY RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months For the nine months
ended September 30, ended September 30,
2007 2006 2007 2006
------------------- -------------------------
REVENUES
Consulting fees $ 2,233,190 $ - $ 2,328,032 $ -
Oil and gas revenue - - 9,674 -
TOTAL REVENUES 2,233,190 - 2,337,706 -
OPERATING EXPENSES
General and administrative 478,733 143,655 1,328,275 249,012
Lease operating expenses 80,228 - 202,783 -
Professional and subcontracted
services 678,411 - 678,411 -
Compensation and benefits 258,740 - 258,740 -
Occupancy, communication and other 112,358 - 112,358 -
Depreciation, depletion and
amortization - - - -
Accretion expense - - 9,212 -
Impairment of oil and gas properties - - 1,338,527 -
OPERATING EXPENSES 1,608,470 143,655 3,928,306 249,012
INCOME (LOSS) FROM OPERATIONS 624,720 (143,655) (1,590,600) (249,012)
OTHER INCOME (EXPENSE)
Interest and other income 157 787 6,867 1,756
Interest expense (217,280) - (297,544) -
OTHER INCOME (EXPENSE) (217,123) 787 (290,677) 1,756
NET INCOME (LOSS) $ 407,597 $(142,868) $ (1,881,277) $ (247,256)
INCOME (LOSS) PER COMMON
SHARE - Basic . $ 0.01 $ (0.00) $ (0.05) $ (0.01)
INCOME (LOSS) PER COMMON
SHARE - Diluted $ 0.01 $ (0.00) $ (0.05) $ (0.01)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - Basic 33,901,262 49,260,000 38,946,918 34,109,817
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - Diluted 34,796,571 49,260,000 38,946,918 34,109,817
See accompanying notes to consolidated financial statements.
F-20
EPIC ENERGY RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,881,277) $ (247,256)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion and amortization - -
Impairment of oil and gas properties 1,338,527 -
Accretion expense 9,212 -
Shares issued for compensation 276,128 -
Imputed interest on acquisition 115,000 -
Amortization of prepaid assets 99,349 -
Changes in operating assets and liabilities:
Accounts receivable (577,176) -
Prepaid expenses and other 30,191 -
Accounts payable 11,812 (3,098)
Accrued liabilities 366,950 21,005
------------ ----------
Net cash used in operating activities (211,284) (229,349)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in joint venture (22,700)
Acquisition of oil and gas properties and
property and equipment (1,031) -
Acquisition of Carnrite, net of cash received 48,227 -
Increase in other assets (304,902)
------------ ----------
Net cash used in investing activities (280,406) -
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt . (114,950) -
Proceeds from debt 193,777 -
Proceeds from issuance of common stock 523,600 440
Capital contributed by stockholders - 305,021
------------ ----------
Net cash provided by financing activities 602,427 305,461
------------ ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 110,737 76,112
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 590,172 -
------------ ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 700,909 $ 76,112
============ ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 5,978 $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of Carnrite with stock $10,696,508 -
See accompanying notes to consolidated financial statements.
F-21
EPIC ENERGY RESOURCES INC.
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements of Epic Energy Resources,
Inc. ("Epic" or "the Company") at September 30, 2007 have been prepared without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been omitted or condensed pursuant to such rules and
regulations. These statements should be read in conjunction with Epic's audited
financial statements and notes thereto for the year ended December 31, 2006
included elsewhere in this prospectus. In management's opinion, these interim
consolidated financial statements reflect all adjustments necessary for a fair
presentation of the consolidated financial position and results of operations
for each period presented. The accompanying unaudited interim financial
statements for the nine months ended September 30, 2007 are not necessarily
indicative of the results which can be expected for the entire year.
Epic was in the development stage until the acquisition of The Carnrite Group
L.L.C. ("Carnrite") on August 13, 2007. As a result, 2007 is the first year
during which Epic is considered an operating company and no longer in the
development stage.
Use of Estimates
The preparation of financial statements in conformity with US 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.
Cash and cash equivalents
For purposes of the statement of cash flow, cash and cash equivalents include
demand deposits, time deposits and short-term liquid investments such as
certificates of deposit with a maturity of three months or less when purchased.
Epic maintains deposits at one financial institution, the balance of which may
at times exceed amounts covered by insurance provided by the U.S. Federal
Deposit Insurance Corporation ("FDIC"). However, Epic has not experienced any
losses in such accounts and does not believe it is exposed to any significant
credit risks from these excess deposits.
Receivables From Clients
Billed receivables from clients are presented at their billed amount less an
allowance for doubtful accounts. Unbilled receivables are stated at net
realizable value less an allowance for non-billable amounts. Epic provides an
F-22
allowance for doubtful accounts on receivables based on historical collection
experience and a specific review of each customer's receivable balance. As of
September 30, 2007, management determined that no allowance for doubtful
accounts was required based on management's assessment of the collect ability of
these items. No accounts were written off during the nine months ended September
30, 2007.
Property and Equipment
Property and equipment consists of office equipment and furniture and are stated
at cost. Depreciation is computed on a straight-line basis over estimated useful
lives ranging from three to five years.
Revenue Recognition
Revenue includes fees primarily generated from consulting services provided. The
Company recognizes revenue from these consulting engagements when hours are
worked, either on a time-and-materials basis or on a fixed-fee basis, depending
on the terms and conditions defined at the inception of an engagement with a
client. The terms of the contracts with clients are fixed and determinable and
may change based upon agreement by both parties. Individual consultants' billing
rates are principally based on a multiple of salary and compensation costs.
Revenue recognized in excess of billings is recorded as unbilled accounts
receivable. Cash collections and invoices generated in excess of revenue
recognized are recorded as deferred revenue until the revenue recognition
criteria are met. Client reimbursable expenses, including those relating to
travel, other out-of-pocket expenses and any third-party costs, are included in
revenue, and an equivalent amount of reimbursable expenses are included in
professional and subcontracted services as a cost of revenue.
Fair Value of Financial Instruments
In accordance with the reporting requirements of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments", the Company calculates the fair
value of its assets and liabilities which qualify as financial instruments under
this statement and includes this additional information in the notes to the
financial statements when the fair value is different than the carrying value of
those financial instruments. The estimated fair value of cash, accounts
receivable and accounts payable approximate their carrying amounts due to the
short maturity of these instruments. The carrying value of short and 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.
Earnings Per Share
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings per Share" which requires the presentation of basic
earnings per share which excludes dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted-average number of
shares of common stock outstanding for the period. The provisions also require
dual presentation of basic and diluted earnings per share on the face of the
F-23
statement of operations and requires a reconciliation of the numerators and
denominators of basic and diluted earnings per share. Employee stock options and
stock warrants were not included in the computation of diluted earnings per
share for the quarter and nine months ended September 30, 2007 and the quarter
and nine months ended September 30, 2006 because the effect of their assumed
exercise would have an antidilutive effect on the computation of diluted loss
per share.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") published
Statement of Financial Accounting Standards No.157, "Fair Value Measurements"
(FAS 157). FAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. FAS 157 applies under other accounting
pronouncements that require or permit fair value measurements and accordingly,
does not require any new fair value measurements. FAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company does not believe the
adoption of FAS 157 will have a material impact on its financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109"("FAS 109"), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FAS No.
109,"Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This Interpretation was effective for fiscal years beginning after
December 15, 2006 so it was effective for the Company in the first quarter of
fiscal year 2007, which began January 1, 2007. The adoption of FIN 48 did not
have a material impact on its financial statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statement" ("SAB 108"), which provides
guidance on how companies should quantify financial statement misstatements. SAB
108 requires that the effect of misstatements that were not corrected at the end
of the prior year be considered in quantifying misstatements in the current-year
financial statements. Two techniques were identified as being used by companies
in practice to accumulate and quantify misstatements -- the "rollover" approach
and the "iron curtain" approach. The rollover approach quantifies a misstatement
based on the amount of the misstatement originating in the current-year income
statement. Thus, this approach ignores the effects of correcting the portion of
the current-year balance sheet misstatement that originated in prior years. The
iron curtain approach quantifies a misstatement based on the effects of
correcting the cumulative misstatement existing in the balance sheet at the end
of the current year, irrespective of the misstatement's year(s) of origination.
SAB 108 permits companies to adjust for the cumulative effect of misstatements
relating to prior years in the carrying amount of assets and liabilities as of
the beginning of the current fiscal year, with an offsetting adjustment to the
opening balance of retained earnings in the year of adoption.
F-24
In February 2007, the Financial Accounting Standards Board (the "FASB") issued
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities -- Including an Amendment of FASB Statement No. 115 ("SFAS 159").
This standard permits an entity to choose to measure many financial instruments
and certain other items at fair value. Most of the provisions in SFAS 159 are
elective; however, the amendment to FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. The FASB's stated objective in
issuing this standard is as follows: "to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions."
The fair value option established by SFAS 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. The
fair value option: (i) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method;
(ii) is irrevocable (unless a new election date occurs); and (iii) is applied
only to instruments and not to portions of instruments.
SFAS 159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity makes that choice in the
first 120 days of that fiscal year and also elects to apply the provisions of
SFAS 157. Epic is currently assessing the impact of SFAS 159 on its financial
statements.
2. Business Combination
On August 13, 2007, Epic acquired The Carnrite Group, LLC, an energy consulting
company, for 3,177,810 shares of its restricted common stock valued at
$10,486,773. The value of the shares issued in the acquisition was based upon a
price of $3.30 per share, which was the closing price of Epic's common stock on
August 13, 2007. Up to 1,673,036 additional shares have been awarded to
employees of Carnrite as retention shares. These shares will be required to be
returned to Epic if the employees of Carnrite voluntarily terminate their
employment prior to March 28, 2009. In accordance with EITF No. 95-8 "Accounting
for Contingent Consideration Paid to the Shareholders for an Acquired Enterprise
in a Business Combination", the contingent consideration is considered
compensation cost for post-combination recognition and not additional purchase
price consideration. In addition, Epic issued 63,556 shares of its restricted
common stock valued at $209,735 as a transaction fee to an individual that
assisted with the acquisition. The consolidated statement of operations includes
the operations of Carnrite for the period from July 1, 2007 through September
30, 2007. Because the actual purchase date for Carnrite was August 13, 2007,
imputed interest in the amount of $115,000 was recorded as of September 30,
2007.
The acquisition and related transactions have been treated as a purchase
business combination for accounting purposes, and Carnrite's assets acquired and
liabilities assumed are recorded at their fair value. The allocations of the
purchase price to Carnrite's assets and liabilities are only preliminary
F-25
allocations based on estimates of fair value and will change when the actual
fair values are determined. Among the provisions of Statement of Financial
Accounting Standards No. 141, "Business Combinations" criteria have been
established for determining whether intangible assets should be recognized
separately from goodwill. Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" provides, among other guidelines, that
goodwill and intangible assets with indefinite lives will not be amortized, but
rather are tested for impairment at least on an annual basis.
The following table presents the allocation of the acquisition cost to the
assets acquired and liabilities assumed, based on estimated fair values:
Amount
Cash $ 48,227
Receivables from clients 1,207,883
Property and equipment, net 26,442
Other assets 4,901
Goodwill 10,082,252
Total assets acquired 11,369,705
Accounts payable (311,197)
Line of credit (362,000)
Total liabilities assumed (673,197)
--------------
Net assets acquired $ 10,696,508
==============
Carnrite commenced its operations on March 28, 2007. Summarized below is the pro
forma statement of operations for the nine months ended September 30, 2007 had
the acquisition of Carnrite taken place as of January 1, 2007:
Amount
------
As Reported RESTATED
----------- --------
Revenues $3,560,318 $ 2,898,209
Operating expenses 4,535,806 4,323,538
Other income (expense) (292,783) (292,783)
------------- -------------
Net loss $(1,268,271) $(1,718,112)
============= =============
Net loss per share $ (0.03) $ (0.04)
============= =============
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time, nor is it
intended to be a projection of future results.
F-26
3. Oil and Gas Properties
Epic has a 100% working interest (approximately 82% net revenue interest) in 58
gas wells located on 28,600 acres in Rush County, Kansas. In January 2007 the
gas wells were shut in due to the closure of the plant which was purchasing the
gas produced from Epic's wells. Epic does not know if the plant will reopen and
is currently looking for an alternate buyer for the gas.
Epic has a 50% working interest (approximate 40% net revenue interest) in seven
shut-in gas wells located on 6,000 acres in Kay County, Oklahoma. Epic estimates
that it will cost approximately $7,000 (with Epic being responsible for its 50%
share) to rework each shut-in well and place the well back on production. Two
wells were successfully tested for commercial production following workovers in
2007. Depending on weather conditions, Epic plans to begin reworking the
remaining shut-in wells during the first quarter of 2008.
In July 2007 Epic formed a joint venture, Epic Exploration and Production LLC,
with a private investment firm to acquire energy assets and oil and gas
properties. Epic will manage the operations of the joint venture. The private
investment firm is responsible for providing capital required to acquire the
assets on a project-by-project basis.
Epic will receive 20% of the net income from any asset or oil and gas property
acquired by the joint venture until the private investment firm receives 100% of
the equity contributed by the private investment firm to acquire the asset or
property. Thereafter, the net income from the asset or property will be
allocated equally between Epic and the private investment firm. As of February
29, 2008, the joint venture was negotiating to acquire working interests,
varying from 50% to 100%, in producing oil wells in Fort Bend and Bazoria
counties, Texas.
4. Line of Credit and Long-Term Debt
On May 1, 2007, Epic entered into a line of credit agreement with a bank which
provided Epic with the ability to borrow up to $800,000. As of September 30,
2007 the amount outstanding under the line of credit was $312,000. Amounts drawn
on the line of credit bear interest at 8.25% per year and are payable on April
30, 2008. Interest is payable monthly. The line of credit is secured by Epic's
accounts at the bank.
On May 9, 2007, Epic borrowed $50,000 from Carnrite Group Consolidated Business
Enterprises Ltd. ("CCBE"). CCBE is owned by Alan Carnrite, a former director of
the Carnrite Group, a wholly-owned subsidiary of Epic. The loan bears interest
at 8.25% and is due on demand.
Epic's gas wells in Rush County, Kansas serve as collateral for a loan which had
a principal balance of $2,680,163 as of September 30, 2007. The loan bears
interest at 10% per year and is payable in equal monthly installments of
$72,000. The loan agreement provides that if the monthly net income from the
wells is less than $72,000, the deficit will be added to the principal amount of
the note. If the monthly net income from the wells is greater than $72,000, the
net income is applied to the note principal. Since the Kansas wells are shut in,
it is anticipated that $25,000 will be added to the note principal each month
until the wells return to production.
F-27
Long-term debt at September 30, 2007 consists of the following:
Amount
Note payable secured by property acquired $ 2,680,163
Line of credit 362,000
Less - current maturities (1,211,505)
------------
Total $ 1,830,658
============
5. Stockholder's Equity
Common Stock
In December 2006, an employment agreement was initiated with the new President
of the oil and gas operations that included the future issuance of 200,000
shares of restricted common stock for services to be provided over the next 36
months. The fair market value using the closing price of the Epic's stock on the
measurement date, was $554,000 of which $46,168 and $138,500 has been recorded
as compensation expense for the three and nine months ended September 30, 2007,
respectively. In addition, on March 26, 2007, 20,000 shares of restricted common
stock were issued to a consultant for services rendered. The fair market value
of the services rendered for the common stock was approximately $61,000 using
the closing price of Epic's stock on the March 26, 2007 measurement date and is
included as compensation expense.
On March 12, 2007, Epic's Chief Executive Officer and President surrendered to
the Company a total of 23,200,000 shares of common stock and these shares were
subsequently retired. This action was taken in order to place the Company in a
favorable position to attract the equity and debt financing required to continue
to execute its business plan.
In the first nine months of 2007, Epic issued 101,500 shares of unregistered
restricted common stock for gross proceeds of $558,000 in private placements.
There were $40,400 of finder's fee related to these offerings. Epic sold 279,000
units with each unit consisting of 2 shares of Epic common stock and one Series
A Warrant and one Series B Warrant. Each Series A Warrant entitles the holder to
purchase one share of the Company's common stock at a price of $2.00 per share
at any time prior to October 31, 2007. The expiration period for the purchase of
the Series A Warrants has been extended to December 31, 2007, due to
management's focus on raising capital to complete the acquisition of Pearl
Investment Company (See Note 7). Each Series B Warrant entitles the holder to
purchase one share of the Company's common stock at a price of $2.50 per share
at any time prior to October 31, 2009. Both the shares and the shares associated
with the warrants are restricted for a one year period. The relative fair value
of the Common Stock and the Warrants was as follows:
F-28
Relative
Shares Fair Value
Common Stock 558,000 $ 412,262
Series A Warrants 279,000 77,386
Series B Warrants 279,000 68,352
---------- -------------
Total proceeds 558,000
Placement fees (40,400)
-------------
Net proceeds $ 517,600
=============
Proceeds raised in these private placements were used for due diligence and
acquisition costs associated with the acquisition of the Rush County, Kansas
property, costs associated with investigating nitrogen and helium processing
equipment for the Rush County, Kansas property, legal and administrative costs
associated with setting up the Joint venture in Kay County Oklahoma, initial
well work and field maintenance costs in Kay county Oklahoma, due diligence
costs associated with several ongoing acquisitions, working capital, and general
and administrative costs.
In August 2007, 3,177,810 shares of restricted common stock were issued in
conjunction with the Carnrite acquisition. In September 2007, 1,673,036 shares
of restricted common stock were issued as contingency shares and in October
2007, 300,000 shares were held in escrow associated with the acquisition of
Pearl Investment Company ("Pearl"). See Note 7.
A total of 107,056 shares were issued to consultants for services rendered with
a value of $336,835 during the nine months ended September 30, 2007.
Warrants
A summary of warrant activity for 2007 is as follows:
Number of Warrants Weighted Aggregate
Outstanding and Average Exercise Intrinsic
Exercisable Price Value
------------------ ---------------- ---------
Outstanding, December 31, 2006 897,100 $ 2.38 $357,438
Granted 558,000 2.25
---------
Outstanding, September 30, 2007 1,455,100 $ 2.33 $2,181,033
=========
As of September 30, 2007, the range of warrant prices for shares under warrants
and the weighted average remaining contractual life is as follows:
Weighted Average
Remaining
Exercise Number of Contractual Life
Price Warrants (in months)
-------- --------- -----------------
Series A Warrants $ 2.00 491,500 3.0
Series B Warrants 2.50 963,600 24.5
---------
1,455,100
F-29
Stock Options
A summary of stock option activity for 2007 is as follows:
Number of Warrants Weighted Aggregate
Outstanding and Average Exercise Intrinsic
Exercisable Price Value
------------------ ---------------- ---------
Outstanding, December 31, 2006 600,000 $ 1.75 $ 618,000
Granted 65,000 $ 3.17 $2,060,050
--------
Outstanding, September 30, 2007 665,000 $ 1.89 $1,290,900
========
As of September 30, 2007, the range of option prices and the weighted average
remaining contractual life is as follows:
Exercise Exercisable Remaining Outstanding Life
Price Number of Shares (in months)
-------- --------------------- ----------------
$ 0.50 300,000 15.0
3.00 300,000 15.0
3.17 65,000 57.3
----------------------------------------------------
As of September 30, 2007, there was approximately $1.7 million of total
unrecognized compensation cost related to unvested share-based compensation
arrangements that is expected to be recognized over a weighted-average period of
1.7 years.
Restricted stock grants consist of the Company's common stock and generally vest
after three years, with the exception of grants under the Non-employee Director
Stock Option Plan, which vest when granted due to the fact that they are granted
in lieu of cash payments. All restricted stock grants are cliff-vested.
Restricted stock awards are valued at the average market price of the Company's
common stock at the date of grant.
6. Segment reporting
With the acquisition of Carnrite during the quarter, Epic has two distinct
business segments, (1) engineering consulting and (2) oil and gas production.
These operating segments were determined based on the nature of the products and
services offered. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. The Company's chief executive officer
and chief operating officer have been identified as the chief operating decision
makers. The Company's chief operating decision makers direct the allocation of
resources to operating segments based on the profitability and cash flows of
each respective segment. The Company evaluates performance based on several
factors, of which the primary measure is business segment operating income. The
accounting policies are the same as those described in Note 1. The following
information summarizes the operating results of these two segments for the nine
months ended September 30, 2007 (RESTATED):
F-30
Engineering Oil and Gas
Segment Segment Consolidated
Revenues $ 1,665,923 $ 9,674 $ 1,675,597
Operating expenses:
General and administrative 641,676 945,339 1,587,015
Lease operating expenses - 202,783 202,783
Professional and subcontracted
services 504,196 - 504,196
Occupancy, communication
and other 75,394 - 75,394
Accretion expense - 9,212 9,212
Impairment of oil and gas
properties - 1,338,527 1,338,527
-------------- ------------ ------------
Total operating expenses 1,221,266 2,495,861 3,717,127
Income (loss) from operations $ 444,657 $(2,486,187) $ (2,041,530)
============== ============ =============
Total assets $ 11,956,925 $ 7,069,569 $ 19,026,494
============== ============ =============
The following information summarizes the operating results of these two
segments for the nine months ended September 30, 2007 (AS REPORTED):
Engineering Oil and Gas
Segment Segment Consolidated
Revenues $ 2,328,032 $ 9,674 $ 2,337,706
Operating expenses:
General and administrative 641,676 945,339 1,587,015
Lease operating expenses - 202,783 202,783
Professional and subcontracted
services 678,411 - 678,411
Occupancy, communication
and other 112,358 - 112,358
Depreciation, depletion
and amortization - - -
Accretion expense - 9,212 9,212
Impairment of oil and gas
properties - 1,338,527 1,338,527
-------------- ------------ ------------
Total operating expenses 1,432,445 2,495,861 3,928,527
Income (loss) from operations $ 895,587 $(2,486,187) $(1,590,600)
============== ============ ============
Total assets $ 12,619,034 $ 7,069,569 $19,688,603
============== ============ ============
7. Subsequent events
In December 2007 Epic acquired Pearl Investment Company (formerly named Pearl
Development Company) for 1,486,240 shares of its common stock and $18,720,000 in
cash. Pearl Investment Company provides consulting services to the oil, gas and
energy industry in the areas of engineering, construction management,
operations, maintenance and oilfield project management.
On December 5, 2007 Epic sold 4,406,334 shares of its common stock to a group of
private investors for gross proceeds of $6,609,500, or $1.50 per share. The
investors also received warrants which entitle the holders to purchase up to
4,406,334 shares of Epic's common stock. The warrants are exercisable at a price
of $1.50 per share and expire on December 5, 2012.
F-31
On December 31, 2007 Epic sold an additional 1,023,001 shares of its common
stock to a group of private investors for gross proceeds of $1,534,502 or $1.50
per share. The investors also received warrants which entitle the holders to
purchase up to 1,023,001 shares of Epic's common stock. The warrants are
exercisable at a price of $1.50 per share and expire on December 5, 2012.
On December 5, 2007 Epic also sold notes in the principal amount of $20,250,000
to a second group of private investors. The notes bear interest annually at 10%
per year. The notes are due and payable on December 5, 2012 and are secured by
liens on all of Epic's assets. The purchasers of the notes also received
warrants which entitle the holders to purchase up to 15,954,853 shares of Epic's
common stock. The warrants are exercisable at a price of $1.65 per share and
expire on December 5, 2012.
Interest on the notes is payable quarterly with the first interest payment due
on January 1, 2008. Beginning December 1, 2008 Epic is required to make
quarterly payments of $1,265,625 toward the principal amount of the notes.
The amount raised in the December 2007 was used as follows:
Amount received from sale of common stock, notes and warrants$ 28,394,003
Less:
Acquisition of Pearl Investment Company (18,720,000)
Reserve for income taxes of Pearl Investment Company
for year ended December 31, 2007 (2,400,000)
Payment of Pearl Investment Company bank loans (1,504,884)
Placement agent fees (1,785,000)
Legal, accounting and other professional fees (125,000)
---------------
Remainder to be used as working capital $ 3,859,119
===============
8. Restatement
Subsequent to the November 15, 2007 filing of its original Quarterly Report for
the reporting period ended September 30, 2007, the Company determined that it
needed to restate the financial statements that accompanied that report. The
restatement was required because of an error made in the preparation of the
financials statements whereby two journal entries were not properly reversed in
the correct accounting period. The restatement affected the accounts receivable
and accounts payable lines on the balance sheet and the consulting fees and
operating expenses sections of the statement of operations.
F-32
The following tables summarize in a condensed format the financial statements
previously reported and restated as of September 30, 2007.
September 30, 2007
---------------------
As Reported As Reported
Restated
BALANCE SHEET
ASSETS
CURRENT ASSETS 2,506,818 1,844,709
NON CURRENT ASSETS 17,181,785 17,181,785
------------- -------------
TOTAL ASSETS 19,688,603 19,026,494
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2,006,440 1,795,261
LONG TERM LIABILITIES 1,982,213 1,982,213
------------- -------------
TOTAL LIABILITIES 3,988,653 3,777,474
STOCKHOLDERS EQUITY
Common stock 21,318,341 21,318,341
Additional paid in capital 331,412 331,412
Accumulated deficit (5,949,803) (6,400,733)
TOTAL STOCKHOLDERS EQUITY 15,699,950 15,249,020
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 19,688,603 19,026,494
============= =============
For the three months For the nine months
ended September 30, ended September 30,
As As
Reported Restated Reported As Restated
-------- -------- -------- -----------
STATEMENT OF OPERATIONS
REVENUES 2,233,190 1,571,081 2,337,706 1,675,597
OPERATING EXPENSES 1,608,470 1,397,291 3,928,306 3,717,127
----------- ----------- ----------- ------------
INCOME (LOSS) FROM OPERATIONS 624,720 173,790 (1,590,600) (2,041,530)
OTHER INCOME (EXPENSE) (217,123) (217,123) (290,677) (290,677)
----------- ----------- ----------- ------------
NET INCOME (LOSS) 407,597 (43,333) (1,881,277) (2,332,207)
=========== =========== =========== ============
INCOME (LOSS) PER COMMON
SHARE - BASIC AND DILUTED $ 0.01 $ (0.00) $ (0.05) $ (0.06)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 33,901,262 33,901,262 38,946,918 38,946,918
For the nine months
ended September 30,
As As
Reported Restated
-------- --------
STATEMENT OF CASH FLOWS
Net loss (1,881,277) (2,332,207)
Changes in operating assets and liabilities:
Accounts receivable (577,176) 84,933
Accounts payable 11,812 (199,367)
Net cash used in operating activities (211,284) (211,284)
Net cash used in investing activities (280,406) (280,406)
Net cash provided by financing activities 602,427 602,427
Net increase in cash and cash equivalents 110,737 110,737
F-33
PEARL DEVELOPMENT COMPANY
Financial Statements as of
December 31, 2006 and 2005
F-34
PEARL DEVELOPMENT COMPANY
Table of Contents
Page
Independent Auditors' Report............................... F-35
Financial Statements
Balance Sheets....................................... F-36
Statements of Income................................. F-37
Statement of Changes in Stockholders' Equity......... F-38
Statements of Cash Flows............................. F-39
Notes to Financial Statements.............................. F-40
F-35
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Pearl Development Company
Lakewood, Colorado
We have audited the accompanying balance sheets of Pearl Development Company as
of December 31, 2006 and 2005, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pearl Development Company as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Ehrhardt Keefe Steiner & Hottman PC
June 6, 2007
Denver, Colorado
F-36
PEARL DEVELOPMENT COMPANY
Balance Sheets
December 31,
2006 2005
---------------------------
Assets
Current assets
Cash and cash equivalents $ 7,369,296 $ 279,320
Accounts receivable - trade 10,580,513 2,115,067
Prepaid expenses 137,345 -
-------------- -------------
Total current assets 18,087,154 2,394,387
-------------- -------------
Non-current assets
Property, plant and equipment, net 2,669,680 861,479
Note receivable - related party 291,871 -
Deposits 28,269 847
-------------- -------------
Total non-current assets 2,989,820 862,326
-------------- -------------
Total assets $ 21,076,974 $ 3,256,713
============== =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 5,690,259 $ 887,291
Accounts payable - related party 93,563 -
Accrued expenses 702,806 475,565
Line-of-credit 500,000 -
Current portion of capital lease obligations 476,976 188,051
-------------- -------------
Total current liabilities 7,463,604 1,550,907
-------------- -------------
Non-current liabilities
Capital lease obligations, less current portion 783,193 187,754
Deposit liability 7,485,412 -
-------------- -------------
Total non-current liabilities 8,268,605 187,754
-------------- -------------
Total liabilities 15,732,209 1,738,661
-------------- -------------
Commitments and contingencies
Stockholders' equity
Common stock, no par value; 1,000 shares
authorized, issued and outstanding - -
Additional paid-in capital 257,443 257,443
Retained earnings 5,087,322 1,260,609
-------------- -------------
Total stockholders' equity 5,344,765 1,518,052
-------------- -------------
Total liabilities and stockholders' equity $ 21,076,974 $ 3,256,713
============== =============
See notes to financial statements.
F-37
PEARL DEVELOPMENT COMPANY
Statements of Income
For the Years Ended
December 31,
2006 2005
-----------------------
Sales
Service revenue $20,400,823 $ 7,746,651
Reimbursed expenses 14,209,933 4,528,032
------------- ------------
Total sales 34,610,756 12,274,683
------------- ------------
Cost of services (exclusive of depreciation
and amortization shown below)
Reimbursed expenses 16,260,146 4,527,963
Professional services 869,494 598,506
Salaries and employee benefits 8,765,176 4,713,646
------------- ------------
Total cost of services 25,894,816 9,840,115
------------- ------------
Gross profit 8,715,940 2,434,568
------------- ------------
General and administrative expenses
Vehicle expense 938,124 474,958
Marketing, promotion, and communication 794,148 268,435
Office expense 503,060 208,602
Insurance 410,501 212,342
Depreciation and amortization 390,121 241,775
Professional fees 340,392 16,464
Specialty equipment 318,850 111,067
Other 303,534 19,893
Aviation expense 143,843 -
Computer software and licenses 138,385 88,057
Training 36,848 10,112
------------- ------------
Total general and administrative expenses 4,317,806 1,651,705
------------- ------------
Income from operations 4,398,134 782,863
------------- ------------
Other income (expense)
Interest expense (59,782) (42,046)
Interest income 177,233 782
Loss on disposal of assets - (22,970)
------------- ------------
Total other income (expense) 117,451 (64,234)
------------- ------------
Net income $ 4,515,585 $ 718,629
============= ============
See notes to financial statements.
F-38
PEARL DEVELOPMENT COMPANY
Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2006 and 2005
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
Balance - December 31, 2004 1,000 $ - $ 257,443 $ 541,980 $ 799,423
Net income - - - 718,629 718,629
------- -------- --------- ---------- ---------
Balance - December 31, 2005 1,000 - 257,443 1,260,609 1,518,052
Distributions to stockholders - - - (688,872) (688,872)
Net income - - - 4,515,585 4,515,585
------- -------- --------- ---------- ---------
Balance - December 31,
2006 1,000 $ - $ 257,443 $5,087,322 $ 5,344,765
======= ======== ========== ========== ===========
See notes to financial statements.
F-39
PEARL DEVELOPMENT COMPANY
Statements of Cash Flows
For the Years Ended
December 31,
2006 2005
---------- ----------
Cash flows from operating activities
Net income $ 4,515,585 $ 718,629
----------- ----------
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 390,121 241,775
Loss on disposal of assets - 22,970
Changes in assets and liabilities
Accounts receivable - trade (8,465,446) (1,434,134)
Prepaid expenses (137,345) -
Deposits (27,422) -
Accounts payable - trade 4,802,968 644,155
Accounts payable - related party 93,563 -
Accrued expenses 227,241 286,165
Deposit liability 7,485,412 -
----------- ----------
4,369,092 (239,069)
Net cash provided by operating activities 8,884,677 479,560
----------- ----------
Cash flows from investing activities
Purchases of property, plant and equipment (1,132,843) (123,314)
Note receivable - related party (291,871) -
----------- ----------
Net cash used in investing activities (1,424,714) (123,314)
----------- ----------
Cash flows from financing activities
Distributions to stockholders (688,872) -
Payments on capital leases (181,115) (179,976)
Proceeds from line of credit 500,000 -
----------- ----------
Net cash used in financing activities (369,987) (179,976)
----------- ----------
Net increase in cash 7,089,976 176,270
Cash and cash equivalents - beginning of year 279,320 103,050
---------- ----------
Cash and cash equivalents - end of year $ 7,369,296 $ 279,320
=========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest for the years ended December 31, 2006 and 2005 was
$59,782 and $42,046, respectively.
Supplemental disclosure of non-cash activity:
The Company entered into capital lease transactions during 2006 and 2005
in the amount of $1,065,479 and $164,760, respectively .
See notes to financial statements.
F-40
PEARL DEVELOPMENT COMPANY
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
Pearl Development Company (the Company) provides value added engineering,
construction and field consulting services to the natural gas production,
gathering, processing, and transportation industry. The Company also supports
the production, refinery, petrochemical, and pipeline industries. The Company's
expertise involves providing high level, conceptual engineering, construction
and field consulting services that improve the profitability of energy industry
companies and to provide support and insight to implement projects in a timely
and cost effective manner.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of 3 months or less to be cash equivalents. The Company continually
monitors its positions with, and the credit quality of, the financial
institutions it invests with. As of the balance sheet date, and periodically
throughout the year, the Company has maintained balances in various operating
accounts in excess of federally insured limits.
Concentrations of Credit Risk
The Company grants credit in the normal course of business to customers. The
Company periodically performs credit analysis and monitors the financial
condition of its customers to reduce credit risk.
The Company records trade accounts receivable in the normal course of business
related to the sale of services or for reimbursement of expenses. The Company
evaluates the collectibility of its accounts receivable periodically and has
determined that no allowance for doubtful accounts is necessary based on a
history of successful collections of amounts due. As such, no allowance for
doubtful accounts has been recorded in the accompanying financial statements.
During the years ended December 31, 2006 and 2005, 2 and 4 customers accounted
for 78% and 82% of total revenues, respectively. At December 31, 2006 and
December 31, 2005, the same customers accounted for 46% and 74% of total
accounts receivable, respectively.
Prepaid Expenses
Prepaid expenses consist primarily of software maintenance, rent, deposits and
other expenses paid in advance
Property and Equipment
Property and equipment is stated at cost. Equipment under capital leases is
valued at the lower of fair market value or net present value of the minimum
lease payments at inception of the lease. Depreciation and amortization is
provided utilizing the straight-line method over the estimated useful lives for
owned assets, ranging from 3 to 10 years, and the related lease terms for
leasehold improvements and equipment under capital leases.
F-41
PEARL DEVELOPMENT COMPANY
Notes to Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
(continued)
Deposit Liability
The deposit liability represents advance payments for procurement of materials
for a customer. During 2006, the Company entered into a contractual relationship
with a customer to procure engineered materials for a gas plant project. The
customer provides funds in a lump sum to the Company to procure the materials
for use in the project. The Company recognizes the related cash and a liability
in the financial statements for future materials to be purchased as agent for
the customer. Any excess funds received shall be refunded to the customer at the
end of the contract.
Revenue Recognition
The Company recognizes revenue from four distinct revenue streams. Service
revenue is received from certain contractual relationships under time and
materials type contracts, for which revenue is recognized monthly in the period
in which the related time is incurred and as expenses are recognized. Agent fees
revenue is recognized in the period in which related materials are purchased and
customers are simultaneously invoiced for reimbursement. Revenues from lump-sum
turn-key contracts is recognized upon achievement of contract milestones, based
on contracts. Interest income is generated from certain customer prepayments for
materials to be procured, received, and paid for on behalf of the customer and
is recognized monthly.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the
years ended December 31, 2006 and 2005 was $65,508 and $7,908, respectively.
Income Taxes
The Company has elected their tax status in accordance with Subchapter S (S
Corporation) of the Internal Revenue Code, as a limited liability corporation
(LLC). As these types of entities are not taxpaying entities for federal or
state income tax purposes, no income tax expense or income tax benefit has been
recorded in these financial statements. Income or losses are reflected in the
stockholders' individual income tax returns.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-42
PEARL DEVELOPMENT COMPANY
Notes to Financial Statements
Note 2 - Notes Receivable - Related Party
During 2006, the Company granted a note receivable in the amount of $290,000 to
Pearl Aviation, an affiliated company, to fund the down payment on an airplane.
The note receivable accrues interest at 7.5% per annum, and both principal and
interest are due and payable on demand. As of December 31, 2006, the Company was
owed $291,871 in principal and interest on the note.
Note 3 - Property and Equipment
Property and equipment, including assets under capital leases (Note 6), consist
of the following:
December 31,
2006 2005
----- -----
Vehicles $1,954,029 $ 565,487
Software 453,649 263,326
Computer equipment 445,642 352,017
Office equipment 327,939 184,684
Equipment 323,978 7,071
Leasehold improvements 142,518 76,848
--------- ---------
3,647,755 1,449,433
Less accumulated depreciation (978,075) (587,954)
--------- ---------
$2,669,680 $ 861,479
========== ==========
Note 4 - Accrued Expenses
Accrued expenses consist of the following:
December 31,
2006 2005
----- -----
Accrued vacation $ 227,536 $ 93,689
Accrued compensation 157,783 168,982
Accrued employee benefits 93,110 73,106
Accrued retirement plan 92,888 27,973
Accrued sales taxes 92,335 8,616
Accrued payroll taxes 23,796 91,326
Accrued expenses 15,358 11,873
--------- ---------
$ 702,806 $ 475,565
========= =========
F-43
PEARL DEVELOPMENT COMPANY
Notes to Financial Statements
Note 5 - Line-of-Credit
December 31,
2006 2005
-----------------------
$3,000,000 line-of-credit payable to a bank, due
December 2007. Interest is at 7.75% payable
monthly. The line contains affirmative and negative
covenants. It is Collateralized by all assets of
the Company and guaranteed by the Company's
president. $500,000 $ -
======== =======
Note 6 - Capital Leases
The Company has acquired assets under the provisions of long-term leases. For
financial reporting purposes, minimum lease payments relating to the assets have
been capitalized. The leases expire between March 1, 2007 and December 15, 2010.
Amortization of the leased property is included in depreciation expense.
The assets under capital lease that are included in property and equipment (Note
3) have cost and accumulated amortization as follows:
December 31,
2006 2005
-----------------------
Vehicles - cost $ 1,954,029 $ 565,487
Less accumulated amortization (392,366) (149,413)
----------- ----------
$ 1,561,663 $ 416,074
=========== ==========
Maturities of capital lease obligations are as follows:
Year Ending December 31,
2007 $ 558,887
2008 538,100
2009 277,856
2010 16,855
-------------
Total minimum lease payments 1,391,698
Amount representing interest (131,529)
-------------
Present value of net minimum lease payments 1,260,169
Less current portion (476,976)
-------------
Long-term capital lease obligation $ 783,193
=============
F-44
PEARL DEVELOPMENT COMPANY
Notes to Financial Statements
Note 7 - Related Party Transactions
The Company has a note receivable from Pearl Aviation, an affiliated company,
related to a loan for the down payment and related closing costs for the
purchase of a Cessna Jet in the amount of $290,000 plus accrued interest of
$1,871 for a balance of $291,871 at December 31, 2006.
The Company owes $93,563 to Pearl Development - Australia, an affiliated
company, related to reimbursable expenses.
The Company is named guarantor of the aircraft loan between Pearl Aviation and
Cessna Financial in the approximate amount of $4,800,000.
Note 8 - Commitments and Contingencies
Operating Leases
The Company leases facilities, equipment and vehicles under non-cancelable
operating leases. Rent expense for these leases was:
Year Ended December 31,
2006 $ 330,303
2005 $ 189,005
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31,
2007 $ 391,555
2008 390,897
2009 394,138
2010 299,390
2011 172,860
-------------
$ 1,648,840
Litigation
In the normal course of business, the Company is party to litigation from time
to time. The Company maintains insurance to cover certain actions and believes
that resolution of such litigation will not have a material adverse effect on
the Company. As of December 31, 2006, management is not aware of any pending or
threatened litigation.
F-45
Note 9 - Subsequent Events
As of January 1, 2007, the Company implemented a reorganization plan to better
manage the risks and cross-liabilities of the Company's various business units
and to allow each business unit to focus on its core business and operations. As
part of the reorganization plan, the Company formally changed its name to "Pearl
Investment Company," and formed the following Colorado entities which are owned
by the Company or are under common ownership or control with the Company: "Pearl
Development Company, LLC"; "Pearl Field Services, LLC"; "Pearl Process Systems,
LLC"; "Pearl Group Management, LLC"; and "Pearl Construction Company, LLC."
F-46
PEARL INVESTMENT COMPANY
Unaudited Condensed Consolidated Financial Statements
September 30, 2007
F-47
PEARL INVESTMENT COMPANY
Table of Contents
Page
Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)......................F-49
Condensed Consolidated Statements of Income (Unaudited)...............F-50
Condensed Consolidated Statements of Cash Flows (Unaudited)...........F-51
Notes to Unaudited Condensed Consolidated Financial Statements...........F-52
F-48
PEARL INVESTMENT COMPANY
Condensed Consolidated Balance Sheet
(unaudited)
September 30,
2007
Assets
Current assets
Cash and cash equivalents $ -
Accounts receivable - trade 13,477,185
Accounts receibable - related party 80,000
Prepaid expenses 267,297
----------
Total current assets 13,824,482
-----------
Non-current assets
Property and equipment, net 9,940,691
Intangible assets 1,000,000
Deposits 184,312
---------
Total non-current assets 11,125,003
-----------
Total assets $24,949,485
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable - trade $ 4,003,767
Bank overdrafts 889,993
Accrued expenses 1,238,391
Line of credit 1,000,000
Current portion of capital lease obligations 1,576,091
----------
Total current liabilities 8,708,242
----------
Non-current liabilities
Capital lease obligations, less current portion 5,572,732
Deposit liability 3,034,419
----------
Total non-current liabilities 8,607,151
----------
Total liabilities 17,315,393
----------
Stockholders' equity
Common stock, no par value; 1,000 shares authorized, issued
and outstanding -
Additional paid-in-capital 257,463
Retained earnings 7,376,629
---------
Total stockholders' equity 7,634,092
----------
Total liabilities and stockholders' equity 24,949,485
==========
See notes to unaudited financial statements.
F-49
PEARL INVESTMENT COMPANY
Condensed Consolidated Statements of Income
(unaudited)
Nine Months Ended
September 30,
2007 2006
-----------------------
Sales
Revenue $37,575,940 $23,200,162
----------- -----------
Total sales 37,575,940 23,200,162
----------- -----------
Cost of services
Reimbursed expenses 15,239,550 10,595,767
Professional services 643,513 760,689
Salaries and employee benefits 12,784,682 5,531,756
----------- ----------
Total cost of services 28,667,745 16,888,212
----------- -----------
Gross profit 8,908,195 6,311,949
----------- -----------
General and administrative expenses
Vehicle expense 738,336 669,809
Marketing, promotion, and communication 945,258 396,645
Office expense 896,565 340,132
Insurance 578,541 313,748
Depreciation and amortization 886,697 212,500
Professional fees 715,846 80,569
Specialty equipment 189,900 156,647
Other (20,052) 26,740
Aviation expense 673,024 0
Computer software and licenses 189,074 113,994
Training 95,437 23,881
----------- ----------
Total general and administrative expenses 5,888,626 2,334,665
----------- ---------
Income from operations 3,019,569 3,977,285
----------- ----------
Other income (expense)
Interest expense (347,170) (38,568)
Interest income 193,712 75,896
Other income 3,578 0
----------- ---------
Total other income (expense) (149,880) 37,328
----------- ----------
Net income $ 2,869,689 $4,014,613
=========== ==========
F-50
PEARL INVESTMENT COMPANY
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
-----------------
2007 2006
Cash flows from operating activities
Net income $2,869,689 $4,014,613
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation and amortization 886,697 212,500
Changes in assets and liabilities
Accounts receivable - trade (2,896,672) (3,103,282)
Accounts receivable - related party (80,000) -
Prepaid expenses (129,952) (95,833)
Deposits (156,043) (19,887)
Accounts payable - trade (1,780,055) 1,547,516
Accounts payable - related party - -
Accrued expenses 535,585 3,104
Deposit liability (4,450,993) 6,504,617
----------- ---------
Net cash provided by (used in)
operating activities (5,201,744) 9,063,348
Cash flows from investing activities
Purchases of property and equipment (1,558,041) (777,862)
Intangible assets - patent technology (1,000,000) 0
Collections on notes receivable - related party 291,871 0
--------- ---------
Net cash used in investing activities (2,266,170) (777,862)
Cash flows from financing activities
Net proceeds from line of credit 500,000 0
Payments on capital leases (711,013) (135,836)
Net increase in bank overdrafts 889,993 -
Distributions to stockholders (580,362) (196,923)
---------- ---------
Net cash provided by (used in) financing 98,618 (332,759)
activities ---------- ---------
Net increase (decrease) in cash and cash
equivalents (7,369,296) 7,952,727
Cash and cash equivalents - beginning of period 7,369,296 279,320
---------- ---------
Cash and cash equivalents - end of period $ - $8,232,047
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest for the nine months ended September 30, 2007 and
2006 was $347,170 and $38,568, respectively.
Supplemental disclosure of non-cash investing and financing activity:
The Company entered into capital lease transactions during the first nine
months of 2007 and 2006 in the approximate amount of $6,600,000 and
$857,000 respectively.
See notes to unaudited financial statements.
F-51
PEARL INVESTMENT COMPANY
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Organization and Nature of Business
Pearl Investment Company (the "Company"), formerly known as Pearl Development
Company, provides value added engineering, construction and field consulting
services to the natural gas production, gathering, processing, and
transportation industry. The Company also supports the production, refinery,
petrochemical, and pipeline industries. The Company's expertise involves
providing high level, conceptual engineering, construction and field consulting
services that improve the profitability of energy industry companies and to
provide support and insight to implement projects in a timely and cost effective
manner.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company
included herein have been prepared by the Company's management, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC") and, in the opinion of management, reflect all adjustments necessary
to present a fair statement of operations, financial position and cash flows.
The Company's management believes that the disclosures are adequate and the
information presented is not misleading, although certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
The accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements and notes of Pearl Development Company
for the year ended December 31, 2006.
The accompanying condensed consolidated financial statements include the
accounts of our wholly-owned subsidiaries: Pearl Development Company, LLC, Pearl
Field Services, LLC, Pearl Group Management, LLC, Pearl Process Systems, LLC,
Pearl Construction Company, LLC and Pearl Aviation, LLC. All significant
intercompany balances and transactions have been eliminated in consolidation.
F-52
Fair Value of Financial Instruments
In accordance with the reporting requirements of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments", the Company calculates the fair
value of its assets and liabilities which qualify as financial instruments under
this statement and includes this additional information in the notes to the
financial statements when the fair value is different than the carrying value of
those financial instruments. The estimated fair value of cash, accounts
receivable and accounts payable approximate their carrying amounts due to the
short maturity of these instruments. The carrying value of the line of credit
and short and long-term capital lease obligations also approximates fair value
since their terms are similar to those in the lending market for comparable debt
and capital leases with comparable risks. None of these instruments are held for
trading purposes.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") published
Statement of Financial Accounting Standards No.157, "Fair Value Measurements"
(FAS 157). FAS 157defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. FAS 157 applies under other accounting pronouncements
that require or permit fair value measurements and accordingly, does not require
any new fair value measurements. FAS 157 is effective for fiscal years beginning
after November 15, 2007. The Company does not believe the adoption of FAS 157
will have a material impact on its financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109"
("FAS 109"), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FAS No.
109,"Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006 so it was effective for the Company in first quarter of fiscal
year 2007, which began on January 1, 2007. The adoption of FIN 48 did not have a
material impact on the Company's financial statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statement" ("SAB 108"), which provides
guidance on how companies should quantify financial statement misstatements. SAB
108 requires that the effect of misstatements that were not corrected at the end
of the prior year be considered in quantifying misstatements in the current-year
financial statements. Two techniques were identified as being used by companies
in practice to accumulate and quantify misstatements -- the "rollover" approach
and the "iron curtain" approach. The rollover approach quantifies a misstatement
based on the amount of the misstatement originating in the current-year income
statement. Thus, this approach ignores the effects of correcting the portion of
the current-year balance sheet misstatement that originated in prior years. The
iron curtain approach quantifies a misstatement based on the effects of
correcting the cumulative misstatement existing in the balance sheet at the end
of the current year, irrespective of the misstatement's year(s) of origination.
SAB 108 permits companies to adjust for the cumulative effect of misstatements
F-53
relating to prior years in the carrying amount of assets and liabilities as of
the beginning of the current fiscal year, with an offsetting adjustment to the
opening balance of retained earnings in the year of adoption.
In February 2007, the Financial Accounting Standards Board (the "FASB") issued
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities -- Including an Amendment of FASB Statement No. 115 ("SFAS 159").
This standard permits an entity to choose to measure many financial instruments
and certain other items at fair value. Most of the provisions in SFAS 159 are
elective; however, the amendment to FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. The FASB's stated objective in
issuing this standard is as follows: "to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions."
The fair value option established by SFAS 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. The
fair value option: (i) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method;
(ii) is irrevocable (unless a new election date occurs); and (iii) is applied
only to instruments and not to portions of instruments.
SFAS 159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity makes that choice in the
first 120 days of that fiscal year and also elects to apply the provisions of
FASB Statement No. 157, Fair Value Measurements ("SFAS 157"). The Company's
management is currently assessing the impact of SFAS 159 on its financial
statements.
Note 2 - Capital Leases
The Company has acquired assets under the provisions of long-term leases. For
financial reporting purposes, minimum lease payments relating to the assets have
been capitalized. The leases expire between March 1, 2007 and November 27, 2018.
Amortization of the leased property is included in depreciation expense.
The assets under capital lease that are included in property and equipment (Note
3) have cost and accumulated amortization as follows:
September 30,
2007 2006
-----------------------
Vehicles - cost $2,447,688 $1,613,665
Less accumulated amortization (267,429) (331,628)
-----------------------
$2,180,259 $1,282,037
F-54
Maturities of capital lease obligations are as follows:
Twelve months ending September 30,
2008 $ 1,890,402
2009 1,572,011
2010 960,471
2011 651,407
Thereafter 4,198,501
-------------
Total minimum lease payments 9,272,792
Amount representing interest (2,123,969)
-------------
Present value of net minimum lease payments 7,148,823
Less current portion (1,576,091)
-------------
Long-term capital lease obligation $5,572,732
==========
F-55
Note 3 - Subsequent Events
In December 2007, the Company was acquired by Epic Energy Resources, Inc. for
1,486,240 shares of its restricted common stock and $18,720,000 in cash. The
1,486,240 shares are restricted securities as that term is defined in Rule 144
of the Securities and Exchange Commission. Up to 3,313,760 additional shares may
be issued in the future to key employees and officers of Pearl Investment
Company subject to certain vesting requirements.
F-56
EPIC ENERGY RESOURCES, INC.
Unaudited Pro Forma Condensed Combined Financial Statements
September 30, 2007 and December 31, 2006
F-57
Epic Energy Resources, Inc.
Unaudited Pro forma Condensed Combined Balance Sheet
September 30, 2007
Pro Forma
Epic Pearl Epic/Pearl
Consolidated Consolidated Pro Forma as of
As of September 30, Adjustments September 30,
2007 2007 Dr Cr 2007
----------- ---------- --- --- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (1), (2) $ 700,909 - 26,675,003 18,720,000 $ 8,655,912
Accounts receivable:
Billed, net of allowance of $0 791,953 13,477,185 14,296,138
Unbilled, at estimated net
realizable value 330,597 - 330,597
AR from affiliates 5,000 80,000 85,000
Prepaid expenses and other 16,250 267,297 283,547
------------- ------------- ------------- ------------- ------------
TOTAL CURRENT ASSETS 1,844,709 13,824,482 26,675,003 18,720,000 23,624,193
Oil and gas properties (full-cost
method), net
Proved 6,075,984 - 6,075,984
Unproved - - -
Other mineral reserves 783,474 - 783,474
Property and equipment, net 27,473 9,940,691 9,968,165
Investment in joint venture 22,700 - 22,700
Other assets (3) 304,902 1,184,312 1,719,000 3,208,214
Goodwill (1) 9,967,252 - 15,767,564 25,734,816
------------- ------------- ------------- ------------- ------------
TOTAL ASSETS $ 19,026,494 $ 24,949,485 $ 44,161,567 $ 18,720,000 $69,417,546
============= ============= ============= ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 207,819 $ 4,003,767 4,211,586
Bank overdrafts - 889,993 889,993
Accrued liabilities (5) 375,936 1,238,391 567,860 2,182,187
Current portion of long term debt 849,505 1,576,091 2,425,596
Line of credit 362,000 1,000,000 1,362,000
------------- ------------- ------------- ------------- ------------
TOTAL CURRENT LIABILITIES 1,795,261 8,708,242 - 567,860 11,071,363
Asset retirement obligations 151,555 - 151,555
Long-term debt (3) 1,830,658 5,572,732 20,250,000 27,653,390
Other long-term liabilities - 3,034,419 3,034,419
Debt discount (4) - - 7,177,458 (7,177,458)
------------- ------------- ------------- ------------- ------------
TOTAL LIABILITIES 3,777,474 17,315,393 7,177,458 20,250,000 34,733,269
STOCKHOLDERS' EQUITY
Common stock (1), (2) 21,318,341 - - 12,825,659 34,144,000
Member equity (1) - 257,463 257,463 -
Additional paid-in capital (1), (4) 331,412 - - 13,085,380 13,416,792
Accumulated (earnings) deficit
(1), (4), (5) (6,400,733) 7,376,629 13,314,298 (538,113) (12,876,515)
------------- ------------- ------------- ------------- ------------
TOTAL STOCKHOLDERS EQUITY 15,249,020 7,634,092 13,571,761 25,372,926 34,684,277
------------- ------------- ------------- ------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 19,026,494 $ 24,949,485 $ 20,749,219 $ 46,190,786 $69,417,546
============= ============= ============= ============= ============
F-58
Epic Energy Resources, Inc.
Unaudited Pro forma Condensed Combined Statement of Operations
Nine Months Ended September 30, 2007
Pro Forma
Epic/Carnrite Pro Forma
Combined Pearl for Epic/Carnrite/Pearl
nine months the nine for the nine
ended months ended months ended
September 30, September 30, Pro Forma September 30,
2007 2007 Adjustments 2007
------------- ------------- ----------- --------------------
REVENUES
Consulting fees $ 2,888,535 $ 37,575,940 $ - $ 40,464,475
Oil and gas revenue 9,673 - - 9,673
Other - - -
------------- ------------- ----------- -------------------
TOTAL REVENUES 2,898,208 37,575,940 - 40,474,148
------------- ------------- ----------- -------------------
OPERATING EXPENSES
Compensation and benefits 12,784,682 416,634 - 13,201,316
Reimbursed expenses 15,239,550 - - 15,239,550
General and administrative (5) 1,348,607 3,389,518 567,860 5,305,985
Lease operating expenses 202,783 - - 202,783
Professional and subcontracted
services 801,894 1,359,359 - 2,161,253
Occupancy, communication and
other 204,355 896,565 - 1,100,920
Depreciation and amortization 1,089 886,697 - 887,786
Accretion expense 10,738 - - 10,738
Impairment of oil and gas
properties 1,338,527 - - 1,338,527
------------- ------------- ----------- -------------------
OPERATING EXPENSES 4,324,627 34,556,371 567,680 39,448,858
------------- ------------- ----------- -------------------
INCOME (LOSS) FROM OPERATIONS (1,426,418) 3,019,569 (567,680) 1,025,291
OTHER INCOME (EXPENSE) (4), (6) (288,571) (149,880) (4,295,802) (4,734,253)
------------- ------------- ----------- -------------------
NET INCOME, BEFORE TAXES (1,714,989) 2,869,689 (4,863,662) (3,708,962)
TAXES - - - -
------------- ------------- ----------- -------------------
NET INCOME (LOSS) $ (1,714,989) $ 2,869,689 $(4,863,662) $ (3,708,962)
============== ============= ============ ===================
LOSS PER COMMON SHARE $ (0.08)
===================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 48,742,691
===================
F-59
Epic Energy Resources, Inc.
Unaudited Pro forma Condensed Combined Statement of Operations
Year Ended December 31, 2006
Pro Forma
Epic for Pearl for Epic/Pearl
the year the year for the year
ended ended ended
December 31, December 31, Pro Forma December 31,
2006 2006 Adjustments 2006
------------ ------------ ------------- --------------
REVENUES
Consulting fees $ 33,190 $34,610,756 $ - $34,643,946
Oil and gas revenue 73,073 - - 73,073
Other revenue - -
------------- ------------- ------------ ------------
TOTAL REVENUES 106,263 34,610,756 - 34,717,019
------------- ------------- ------------ ------------
OPERATING EXPENSES
Compensation and benefits - 8,765,176 - 8,765,176
Reimbursed expenses - 16,260,146 - 16,260,146
General and administrative 926,301 3,424,625 - 4,350,926
Lease operating expenses 59,460 - - 59,460
Professional and
subcontracted services - 869,494 - 869,494
Occupancy, communication
and other - 503,060 - 503,060
Depreciation and amortization 30,814 390,121 - 420,935
Accretion expense 725 - - 725
Impairment of oil and gas
properties 3,062,265 - - 3,062,265
------------- ------------- ------------ ------------
OPERATING EXPENSES 4,079,565 30,212,622 - 34,292,187
------------- ------------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS (3,973,302) 4,398,134 - 424,832
OTHER INCOME (EXPENSE) (4), (6) 3,088 117,451 (5,155,870) (5,035,331)
------------- ------------- ------------ ------------
NET INCOME (LOSS), BEFORE TAXES (3,970,214) 4,515,585 (5,155,870) (4,610,499)
TAXES - - - -
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ (3,970,214) $ 4,515,585 $(5,155,870) $(4,610,499)
============= ============= ============ ============
LOSS PER COMMON SHARE $ (0.09)
============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 48,852,566
============
F-60
EXPLANATORY NOTES
Pro forma adjustments
1. The adjustment to the balance sheet for the acquisition is to recognize
the consideration for the acquisition, being 1,486,240 shares of Epic
common stock valued at the closing price on December 5, 2007 of $3.15 per
share and $18,720,000 in cash. The excess purchase price paid over net
book value is recorded as Goodwill. The equity of Pearl is eliminated as
is standard in consolidation of acquired entities.
2. The adjustment to the balance sheet for the issuance of 5,429,355 shares
of common stock in the equity offering, raising gross proceeds of
$8,144,003.
3. The adjustment to the balance sheet for the issuance of $20,250,000 of 10%
notes.
4. The adjustment to the balance sheet to reflect the derivative liability
associated with the issuance of in-the-money warrants in the equity and
note offerings per 2. and 3. above.
5. An adjustments was made for potential liquidated damages that must be paid
in cash if the registration statement to be utilized to register the
shares is not declared effective within 120 days after the offering. The
penalty is 2% of the gross proceeds for both the debt and equity offering
and amounts to $567,860 for each 30 days that the registration statement
is not declared effective.
6. The adjustment to the income statement for the interest expense accrued
on the $20,250,000 notes issued in conjunction with the Pearl
acquisition.
F-61
THE CARNRITE GROUP, LLC
FINANCIAL STATEMENTS AS OF
JUNE 30, 2007
F-62
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Carnrite Group L.L.C.
We have audited the accompanying balance sheet of The Carnrite Group L.L.C. (the
"Company") as of June 30, 2007, and the related statements of income, members'
equity and cash flows for the period from March 28, 2007 (inception) through
June 30, 2007. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Carnrite Group L.L.C. as of
June 30, 2007, and the results of its operations and cash flows for the period
from March 28, 2007 (inception) through June 30, 2007, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Malone & Bailey, PC
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
October 29, 2007
F-63
THE CARNRITE GROUP L.L.C.
Balance Sheet
June 30, 2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 48,227
Receivables from clients:
Billed, net of allowance of $0 596,473
Unbilled, at estimated net realizable value 611,410
-----------
TOTAL CURRENT ASSETS 1,256,110
Property and equipment, net 26,442
Other assets 4,901
===========
TOTAL ASSETS $1,287,453
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 309,556
Accounts payable - related party 1,641
Lines of credit 362,000
-----------
TOTAL CURRENT LIABILITIES 673,197
Non-current liabilities 0
-----------
TOTAL LIABILITIES 673,197
Members' Equity 614,256
-----------
TOTAL LIABILITIES AND MEMBERS' EQUITY $1,287,453
===========
The accompanying notes are an integral part of these financial
statements.
F-64
THE CARNRITE GROUP L.L.C.
Income Statement
For the period from March 28, 2007 (inception) through June 30, 2007
REVENUES
Consulting fees $1,222,612
-----------
TOTAL REVENUES 1,222,612
OPERATING EXPENSES
Depreciation and amortization expense 1,089
Professional and subcontracted services 297,698
Compensation and benefits 157,894
Occupancy, communication and other 128,961
General and administrative 21,858
-----------
OPERATING EXPENSES 607,500
INCOME FROM OPERATIONS 615,112
Interest expense 2,106
-----------
OTHER EXPENSES 2,106
-----------
NET INCOME $ 613,006
===========
The accompanying notes are an integral part of these financial
statements.
F-65
THE CARNRITE GROUP L.L.C.
Statement of Members' Equity For the period from
March 28, 2007 (inception) through June 30, 2007
BALANCE, March 28, 2007 $ -
Members' contributions 1,250
Net income 613,006
----------
BALANCE, June 30, 2007 $ 614,256
==========
The accompanying notes are an integral part of these financial
statements.
F-66
THE CARNRITE GROUP L.L.C.
Statement of Cash Flows
For the period from March 28, 2007 (inception) through June 30, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 613,006
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization 1,089
Changes in operating assets and
liabilities:
Accounts receivable (1,207,88)
Other assets (4,901)
Accounts payable 311,197
-----------
NET CASH USED IN OPERATING ACTIVITIES (287,492)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (27,531)
----------
NET CASH USED IN INVESTING ACTIVITIES (27,531)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from members' contributions 1,250
Borrowings under lines of credit 362,000
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 363,250
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 48,227
CASH AND CASH EQUIVALENTS, March 28, 2007 -
-----------
CASH AND CASH EQUIVALENTS, June 30, 2007 $ 48,227
===========
The accompanying notes are an integral part of these financial
statements.
F-67
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
- -----------------------------------
The Carnrite Group L.L.C. (the Company) is a Texas Limited Liability Company
focused on providing strategic and operational consulting services to the broad
energy industry. The Company's consultants have industry experience that spans
the upstream, midstream, downstream, and utility sectors of the energy industry.
The Company covers areas that include reservoir management, project management,
commodity marketing and trading, financial analysis, acquisition due diligence,
and organizational design. The Company is currently engaged with several
multi-national companies on assignments both domestically and internationally.
Basis of Presentation
- ---------------------
These financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP").
Use of Estimates
- ----------------
The preparation of financial statements in conformity with US 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.
Cash and cash equivalents
- -------------------------
For purposes of the statement of cash flow, cash and cash equivalents include
demand deposits, time deposits and short-term liquid investments such as
certificates of deposit with a maturity of three months or less when purchased.
The Company maintains deposits at one financial institution, the balance of
which may at times exceed amounts covered by insurance provided by the U.S.
Federal Deposit Insurance Corporation ("FDIC"). However, the Company has not
experienced any losses in such accounts and does not believe it is exposed to
any significant credit risks from these excess deposits.
Receivables From Clients
- ------------------------
Billed receivables from clients are presented at their billed amount less an
allowance for doubtful accounts. Unbilled receivables are stated at net
realizable value less an allowance for non-billable amounts.
F-68
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company provides an allowance for doubtful accounts on receivables based on
historical collection experience and a specific review of each customer's
receivable balance. As of June 30, 2007, management determined that no allowance
for doubtful accounts was required based on management's assessment of the
collect ability of these items. No accounts were written off during the period
from March 28, 2007 (inception) through June 30, 2007.
Property and Equipment
- ----------------------
Property and equipment consists of office equipment and furniture and are stated
at cost. Depreciation is computed on a straight-line basis over estimated useful
lives ranging from three to five years.
Impairment
- ----------
The Company has adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" and periodically evaluates, using independent appraisals
and projected undiscounted cash flows, the carrying value of its long-lived
assets and whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. There were no impairment
charges during the period from March 28, 2007 (inception) through June 30, 2007.
Revenue Recognition
- -------------------
Revenue includes fees primarily generated from consulting services provided. The
Company recognizes revenue from these consulting engagements when hours are
worked, either on a time-and-materials basis or on a fixed-fee basis, depending
on the terms and conditions defined at the inception of an engagement with a
client. The terms of the contracts with clients are fixed and determinable and
may change based upon agreement by both parties. Individual consultants' billing
rates are principally based on a multiple of salary and compensation costs.
Revenue recognized in excess of billings is recorded as unbilled accounts
receivable. Cash collections and invoices generated in excess of revenue
recognized are recorded as deferred revenue until the revenue recognition
criteria are met. Client reimbursable expenses, including those relating to
travel, other out-of-pocket expenses and any third-party costs, are included in
revenue, and an equivalent amount of reimbursable expenses are included in
professional and subcontracted services as a cost of revenue.
Income Taxes
- ------------
The Company is treated as a partnership for federal income tax purposes;
therefore, it is not taxed. Under Subchapter K of the Internal Revenue Code,
each member is taxed separately on their distributive share of the Company's
income whether or not that income is actually distributed.
F-69
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
- -----------------------------------
In accordance with the reporting requirements of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments", the Company calculates the fair
value of its assets and liabilities which qualify as financial instruments under
this statement and includes this additional information in the notes to the
financial statements when the fair value is different than the carrying value of
those financial instruments. The estimated fair value of cash, accounts
receivable and accounts payable approximate their carrying amounts due to the
short maturity of these instruments. The carrying value of short and 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.
Recent Accounting Pronouncements
- --------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") published
Statement of Financial Accounting Standards No.157, "Fair Value Measurements"
(FAS 157). FAS 157defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. FAS 157 applies under other accounting pronouncements
that require or permit fair value measurements and accordingly, does not require
any new fair value measurements. FAS 157 is effective for fiscal years beginning
after November 15, 2007. The company does not believe the adoption of FAS 157
will have a material impact on its financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109"("FAS 109"), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FAS No.
109,"Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006 so it will be effective for the company in first quarter of
fiscal year 2008, which begins on January 1, 2008. The Company does not believe
the adoption of FIN 48 will have a material impact on its financial statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statement" ("SAB 108"), which provides
guidance on how companies should quantify financial statement misstatements. SAB
108 requires that the effect of misstatements that were not corrected at the end
of the prior year be considered in quantifying misstatements in the current-year
financial statements. Two techniques were identified as being used by companies
in practice to accumulate and quantify misstatements -- the "rollover" approach
and the "iron curtain" approach. The rollover approach quantifies a misstatement
based on the amount of the
F-70
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
misstatement originating in the current-year income statement. Thus, this
approach ignores the effects of correcting the portion of the current-year
balance sheet misstatement that originated in prior years. The iron curtain
approach quantifies a misstatement based on the effects of correcting the
cumulative misstatement existing in the balance sheet at the end of the current
year, irrespective of the misstatement's year(s) of origination. SAB 108 permits
companies to adjust for the cumulative effect of misstatements relating to prior
years in the carrying amount of assets and liabilities as of the beginning of
the current fiscal year, with an offsetting adjustment to the opening balance of
retained earnings in the year of adoption.
In February 2007, the Financial Accounting Standards Board (the "FASB") issued
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities -- Including an Amendment of FASB Statement No. 115 ("SFAS 159").
This standard permits an entity to choose to measure many financial instruments
and certain other items at fair value. Most of the provisions in SFAS 159 are
elective; however, the amendment to FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. The FASB's stated objective in
issuing this standard is as follows: "to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions."
The fair value option established by SFAS 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. The
fair value option: (i) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method;
(ii) is irrevocable (unless a new election date occurs); and (iii) is applied
only to instruments and not to portions of instruments.
SFAS 159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity makes that choice in the
first 120 days of that fiscal year and also elects to apply the provisions of
FASB Statement No. 157, Fair Value Measurements ("SFAS 157"). The Company is
currently assessing the impact of SFAS 159 on its financial statements.
NOTE 2 - LINES OF CREDIT
The Company's borrowings consist of two lines of credit.
On May 1, 2007, the Company entered into a line of credit agreement with Compass
Bank for a total of $800,000. As of June 30, 2007, the amount outstanding under
the line of credit was $312,000. The loan bears interest at 8.25% and matures
April 30, 2008. Interest is payable monthly and principal is due at maturity.
The credit agreement is secured by all accounts of the Company.
F-71
NOTE 2 - LINES OF CREDIT (Continued)
On May 9, 2007, the Company borrowed $50,000 from Carnrite Consolidated Business
Enterprises Ltd. ("CCBE"). CCBE is owned by Alan Carnrite (principal director at
The Carnrite Group L.L.C.) who had an option to purchase 40% of the Company. The
loan bears interest at 8.25% and matures May 15, 2012. The note is callable by
the lender at any point. The Company must make principal payments in the amount
of 85% of cash in excess of $300,000 at each month end.
NOTE 3 - MEMBERS' EQUITY
On March 28, 2007, the Company issued members' equity to five individuals in
exchange for cash of $1,250.
On March 28, 2007, the Company issued an option to Alan G. Carnrite to purchase
a 40% membership interest in the Company. The option had an exercise price of $1
and a term of two years. The fair value for the option granted was estimated at
the date of grant using the Black-Scholes option-pricing model assuming an
expected life of 2.0 years, a risk-free rate of 4.53% and an expected volatility
of 100%. The Black-Scholes option-pricing model resulted in a total fair value
on the date the option was granted of $499. In August 2007, Alan G. Carnrite
exercised the option.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
- ------
On April 23, 2007, the Company entered into an agreement to lease office
facilities and copier in Houston, Texas leased under a twenty-four month
operating lease agreement. The agreement expires May 1, 2009, and provides for
base monthly rental payments of $2,500 through May 1, 2008, and $2,750 for the
final 12 months of the lease. The lease may be renewed for an additional year at
the option of the Company at a rate of $3,000 per month. During the period from
March 28, 2007 (inception) through June 30, 2007, rent expense totaled $13,183.
Future minimum lease payments for The Carnrite Group operating lease commitments
are:
Fiscal Lease
Year Commitments
- ---------------------------- ------------------
2008 $35,240
2009 14,240
2010 3,240
2011 1,215
2012 0
Thereafter 0
------------------
Total $ 53,935
==================
F-72
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
We evaluate office capacity on an ongoing basis to meet changing needs in our
markets with a goal of minimizing our occupancy expense.
License Fee Commitments under License Agreement
- -----------------------------------------------
The Company entered into an agreement to license certain products. These
products are databases containing primarily financial data at the industry and
company level that is used by the Company in connection with the preparation of
presentations, publications, and other materials as part the Company's ordinary
business activities. Under the agreement, the Company is obligated to pay
quarterly license fees of $5,000, through the term year ending May 15, 2008 and
may be renewed on terms agreed to by both parties. As of September 30, 2007, the
Company had paid $10,000 of the annual license fees. Under the terms of the
agreement, the Company has no obligation beyond May 15, 2008 regarding any fees
associated with this licensed products.
Concentrations of Risk
- ----------------------
As of June 30, 2007, two of the Company's customers accounted for 63% and 29% of
total accounts receivable, respectively. For the period from March 28, 2007
(inception) through June 30, 2007, the company's two largest customers accounted
for 37% and 15% of total revenues.
NOTE 5 - SUBSEQUENT EVENTS
In August 2007, the Company was acquired by Epic Energy Resources, Inc. ("Epic")
for 3,177,812 shares of Epic's restricted common stock. In connection with this
acquisition, 1,673,036 additional shares of Epic common stock were issued to key
officers of the Company as retention shares that will vest in two years from
March 28, 2007, which is the effective date of the acquisition. All or part of
these shares will be returned to Epic if one or more officers of the Company
voluntarily terminate their employment prior to March 23, 2009.
F-73
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY ...................................
RISK FACTORS .........................................
MARKET FOR COMMON STOCK ..............................
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION ...........................
BUSINESS..............................................
MANAGEMENT ...........................................
PRINCIPAL SHAREHOLDERS................................
SELLING SHAREHOLDERS..................................
DESCRIPTION OF SECURITIES.............................
LEGAL MATTERS ........................................
EXPERTS ..............................................
INDEMNIFICATION ......................................
AVAILABLE INFORMATION.................................
FINANCIAL STATEMENTS..................................
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this prospectus, and
if given or made, such information or representations must not be relied upon as
having been authorized by Security Devices. This prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, any of the securities
offered in any jurisdiction to any person to whom it is unlawful to make an
offer by means of this prospectus.
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table lists the costs and expenses payable by the Company in
connection with the issuance and distribution of the securities being
registered.
SEC Filing Fee $ 4,451
Blue Sky Fees and Expenses 300
Legal Fees and Expenses 70,000
Accounting Fees and Expenses 25,000
Miscellaneous Expenses 249
------------
TOTAL $ 100,000
============
All expenses other than the SEC filing fee are estimated.
Item 14. Indemnification of Officers and Directors
The Colorado Business Corporation Act provides that the Company may
indemnify any and all of its officers, directors, employees or agents or former
officers, directors, employees or agents, against expenses actually and
necessarily incurred by them, in connection with the defense of any legal
proceeding or threatened legal proceeding, except as to matters in which such
persons shall be determined to not have acted in good faith and in the Company's
best interest.
Item 15. Recent Sales of Unregistered Securities.
The following lists all shares issued by the Company since December 31,
2004 which were not registered with the Securities and Exchange Commission.
Unless otherwise indicated, all per share information has been adjusted to
reflect a 20-for-1 forward split of the Company's common stock which was
approved by the Company's shareholders in March 2005.
April 2006 Sales
- ----------------
Name Date of Sale Shares Warrants Consideration
- ---- ------------ ------ -------- -------------
Rex Doyle 4-4-06 20,000,000 (1) -- $200
John Ippolito 4-4-06 20,000,000 (1) -- $200
David Reynolds 4-4-06 2,000,000 -- $ 20
Dana Walters 4-4-06 1,000,000 -- $ 10
Joseph Lindquist 4-4-06 1,000,000 -- $ 10
(1) On March 12, 2007 Rex Doyle and John Ippolito each agreed to the
cancellation of 11,600,0000 of their respective shares.
1
Services Provided by Officers and Consultants
Name Date Shares Consideration
---- ---- ------ --------------
John Sherwood 12/18/06 15,000 Services rendered as a director
and valued at $11,419.
W. Robert Eissler 12/18/06 15,000 Services rendered as a director
and valued at $11,419.
Dr. Robert M. Ferguson 12/18/06 15,000 Services rendered as a director
and valued at $11,419.
W. Steven Goff 12/18/06 10,000 Services rendered as President
of Epic Exploration and
Production LLC and valued at
$7,613.
Michael Kinney 12/18/06 20,000 Accounting services rendered and
valued at $15,225.
Michael Kinney 3/26/07 20,000 Accounting Services rendered and
valued at $61,000.
Michael Kinney 6/6/07 20,000 Accounting services rendered and
valued at $62,500.
Gary L. Christensen 9/14/07 63,556 Services rendered in connection
with the acquisition of the
Carnrite Group, LLC and valued
at $209,735.
Rex P. Doyle 12/13/07 300,000 Services as an officer and
valued at $990,000.
John Ippolito 12/13/07 300,000 Services as an officer and
valued at $990,000.
2
Oil and Gas Properties
- ----------------------
Name Date Shares Consideration
---- ---- ------ -------------
Dick Schremmer 12/22/06 2,200,000 Interest in Kansas oil and
gas property
Edwin Gressel 12/22/06 1,000,000 Interest in Kansas oil and
gas property
Harold Gordon 2/16/07 1,923 Interest in Oklahoma oil
and gas property
David Howard 2/16/07 1,923 Interest in Oklahoma oil
and gas property
Private Placement
- -----------------
Between October 2006 and April 2007 the Company raised $1,414,100, net of
commissions, from the sale of 1,455,100 shares of its common stock, plus 491,500
Series A warrants and 963,600 Series B warrants, to private investors. The
Series A warrants expired on December 31, 2007. Each Series B Warrant entitles
the holder to purchase one share of the Company's common stock at a price of
$2.50 per share at any time prior to September 30, 2009. The Company paid
commissions of $40,400 in connection with the sale of these securities.
The Carnrite Group LLC
- ----------------------
Name Date Shares Consideration
---- ---- ------ -------------
Alan G. Carnrite 8/10/07 1,271,125 Membership interest in the
Carnrite Group, LLC.
Gillian A. Tilbury 8/10/07 381,337 Membership interest in the
Carnrite Group, LLC.
Lea Ann Robertson 8/10/07 381,337 Membership interest in the
Carnrite Group, LLC.
Rita L. Williams 8/10/07 381,337 Membership interest in the
Carnrite Group, LLC.
Sherri L. Herzig 8/10/07 381,337 Membership interest in the
Carnrite Group, LLC.
Carolyn N. Stortstrom 8/10/07 381,337 Membership interest in the
Carnrite Group, LLC.
3
Pearl Investment Company
- ------------------------
Name Date Shares Consideration
---- ---- ------ -------------
R. Bret Rhinesmith 12/5/07 1,000,000 Shares of Pearl
Investment Company.
Curtis L. Good 12/5/07 126,928 Shares of Pearl Investment
Company.
Patrick A. Redalen 12/5/07 59,312 Shares of Pearl Investment
Company.
Kindra Snow-McGregor 12/5/07 75,000 Services rendered.
Michael J. Kraft 12/5/07 75,000 Services rendered.
Edward C. Relaford, Jr. 12/5/07 75,000 Services rendered.
Larry W. Bridger 12/5/07 75,000 Services rendered.
Epic Integrated Solutions LLC
- -----------------------------
Name Date Shares Consideration
---- ---- ------ -------------
Joseph Allen Wright 2/20/08 500,000 Membership interest in
Epic Integrated Solutions,
LLC
Richard Dean Harvey 2/20/08 250,000 Membership interest in
Epic Integrated Solutions,
LLC
Traci Marlene Harvey 2/20/08 250,000 Membership interest in
Epic Integrated Solutions,
LLC
Common Stock and Warrants
- -------------------------
On December 5, 2007 Epic sold 5,096,002 shares of its common stock, plus
warrants, to the investors listed below. Each warrant entitles the holders to
purchase one share of the Epic's common stock. The warrants are exercisable at a
price of $1.50 per share and expire on December 5, 2012.
On December 31, 2007 Epic sold an additional 1,023,001 shares of its
common stock to a group of private investors for gross proceeds of $1,534,502 or
$1.50 per share. The investors also received warrants which entitle the holders
to purchase up to 1,023,001 shares of Epic's common stock. The warrants are
exercisable at a price of $1.50 per share and expire on December 5, 2012.
Name Date of Sale Shares Warrants Consideration
- ---- ------------ ------ -------- -------------
Chestnut Ridge Partners, LP 12-05-07 200,000 200,000 $300,000
4
Name Date of Sale Shares Warrants Consideration
- ---- ------------ ------ -------- -------------
Ironman PI Fund (QP), L.P. 12-05-07 500,000 500,000 $750,000
Truk Opportunity Fund, LLC 12-05-07 250,000 250,000 $375,000
Truk International Fund, LP 12-05-07 83,333 83,333 $125,000
Brio Capital L.P. 12-05-07 100,000 100,000 $150,000
GCA Strategic Investment Fund Ltd. 12-05-07 333,333 333,333 $500,000
Cranshire Capital, L.P. 12-05-07 166,667 166,667 $250,000
Midsummer Investment, Ltd. 12-05-07 500,000 500,000 $750,000
Fort Mason Master, LP 12-05-07 469,550 469,550 $704,325
Fort Mason Partners, LP 12-05-07 30,450 30,450 $45,675
Fraser Black and Deirdre D. Black 12-05-07 333,333 333,333 $500,000
Marcus Wilkins 12-05-07 100,000 100,000 $150,000
Robert R. Henry 12-05-07 130,000 130,000 $195,000
C. Allen Robinson 12-05-07 66,666 66,666 $99,999
Castex New Ventures, L.P. 12-05-07 666,667 666,667 $1,000,000
Roger S. Kellett 12-05-07 35,000 35,000 $52,500
Ricky D. Needham 12-05-07 22,000 22,000 $33,000
Thomas E. Palmer Jr. 12-05-07 20,000 20,000 $30,000
Thomas Edwin Palmer Sr. 12-05-07 33,334 33,334 $50,001
Terry P. Sellers 12-05-07 33,333 33,333 $50,000
Continental American Resources, Inc.12-05-07 33,333 33,333 $50,000
Morgan J. Scudi 12-05-07 40,000 40,000 $60,000
Albert G Aaron 12-05-07 66,667 66,667 $100,000
Edward Perera 12-05-07 76,001 76,001 $114,001
5
Name Date of Sale Shares Warrants Consideration
- ---- ------------ ------ -------- -------------
Warren W. Smith 12-05-07 66,667 66,667 $100,000
William Reed Moraw 12-05-07 50,000 50,000 $75,000
M. Richard Asher 12-31-07 466,667 466,667 $700,000
Susanne Young 12-31-07 66,667 66,667 $100,000
Steven Hahn 12-31-07 66,667 66,667 $100,000
Jeffrey Hahn 12-31-07 66,667 66,667 $100,000
Braden S. Carlsson 12-31-07 23,000 23,000 $34,500
Retzloff Family Company Ltd. 12-31-07 333,333 333,333 $500,000
Notes and Warrants
- ------------------
On December 5, 2007 the Company sold notes in the principal amount of
$20,250,000 plus warrants, to the investors listed below. Each warrant entitles
the holders to purchase one share of the Company's common stock. The warrants
are exercisable at a price of $1.65 per share and expire on December 5, 2012.
Principal
Name Amount of Note Warrants
- ---- -------------- --------
Shelter Island Opportunity Fund, LLC $1,000,000 787,879
William H. Wilson, Jr. $70,000 55,152
H. Steven Walton $50,000 39,394
Peter Morin $65,000 51,213
Todd M. Binet $65,000 51,513
Cranshire Capital, L.P. $250,000 196,970
Midsummer Investment, Ltd. $4,500,000 3,545,455
Fort Mason Master, L.P. $2,112,975 1,664,769
Fort Mason Partners, L.P. $137,025 107,960
Whitebox Convertible Arbitrage $5,500,000 4,333,334
Partners, LP
6
Pandora Select Partners, LP $3,000,000 2,363,637
Whitebox Special Opportunities $3,000,000 2,363,637
Partners Series B, LP
Guggenheim Portfolio Company $500,000 393,940
XXXI, LLC
Rodman & Renshaw acted as the lead placement agent for the sale of the
common stock, notes and warrants. For its services in this regard, Rodman &
Renshaw received $1,849,000 in cash from the Company, as well as warrants to
purchase 1,301,151 shares of the Company's common stock. Warrants to purchase
184,333 shares are exercisable at a price of $1.50 per share and warrants to
purchase 1,116,818 shares are exercisable at a price of $1.65 per share. The
Company paid $235,000 to other placement agents, none of which were affiliated
with the Company, participating in the financing.
The Company relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933 with respect to the issuance of the shares of common
stock, notes and warrants listed in this Item 15. The persons who acquired these
shares were sophisticated investors. The persons who acquired these shares
acquired them for their own accounts. The certificates representing these shares
will bear a restricted legend providing that they cannot be sold except pursuant
to an effective registration statement or an exemption from registration.
Item 16. Exhibits and Financial Statement Schedules
The following exhibits are filed with this Registration Statement:
Exhibit
Number Exhibit Name
- ------- ------------
3.1 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 *
--------------------------------
3.3 Bylaws *
--------------------------------
5 Opinion of Counsel
10.1 Agreement relating to the Incorporated by reference to
acquisition of the Carnrite Exhibit 10 to the Company's
Group, LLC report on Form 8-K dated August
10, 2007.
7
Exhibit
Number Exhibit Name
- ------- ------------
10.2 Agreement relating to the acquisition Incorporated by reference to
of Pearl Investment Company Exhibit 10.1 to the Company's
report onForm 8-K dated December
5, 2007.
10.3 Securities Purchase Agreement Incorporated by reference to
(together with schedule required Exhibit 10.2 to the Company's
by Instruction 2 to Item 601 of report on Form 8-K dated
Regulation S-K) pertaining to the December 5, 2007.
sale of common stock and warrants
10.4 Purchase Agreement Incorporated by reference to
(together with schedule required Exhibit 10.3 to the Company's
by Instruction 2 to Item 601 of report on Form 8-K dated
RegulationS-K) pertaining to the December 5, 2007.
sale of the notes and warrants
10.5 Agreements relating to the acquisition
of Epic Integrated Solutions LLC
21. Subsidiaries *
-------------------------------
23.1 Consent of Attorneys
23.2 Consent of Accountants
* Previously filed.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section l0 (a)(3) of the
Securities Act:
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
8
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of l933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
9
SIGNATURES
Pursuant to the requirements of the Securities Act of l933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Woodlands, Texas on
the 17th day of March 2008.
EPIC ENERGY RESOURCES, INC.
Date: March __, 2008 By: /s/ Rex P. Doyle
----------------------------------
Rex P. Doyle, President and Principal
Executive Officer
Date: March 13, 2008 By: /s/ Michael Kinney
-------------------------------------
Michael Kinney, Principal Financial and
Accounting Officer
Pursuant the requirements of the Securities Act of l933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Rex P. Doyle Director, President March 17, 2008
- ------------------------- and Principal
Rex P. Doyle Executive Officer
/s/ W. Robert Eissler Director March 17, 2008
- -------------------------
W. Robert Eissler
/s/ Dr. Robert M. Ferguson Director March 14, 2008
- -------------------------
Dr. Robert M. Ferguson
Director March __, 2008
- -------------------------
Kevin G. McMahon
EPIC ENERGY RESOURCES, INC.
FORM S-1
Amendment No. 1
EXHIBITS