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. 3
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)
1450 Lake Robbins Drive, Suite 160
The Woodlands, TX 77380
(281) 419-3742
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(Address and telephone number of principal executive offices)
1450 Lake Robbins Drive, Suite 160
The Woodlands, TX 77380
(281) 419-3742
----------------------------------------------------------
(Address of principal place of business or intended principal place of business)
Rex P. Doyle
1450 Lake Robbins Drive, Suite 160
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
As soon as practicable after the effective date of this Registration Statement
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
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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 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]
(Do not check if a smaller reporting company)
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 22,685,031 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 June 30, 2008 the closing price for one share of the Epic's common
stock was $0.65.
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 1,786,240 shares of its common stock and cash of
$19,020,000.
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 $1,400,000 will be paid
to the three owners in periodic installments during 2008 and 2009.
The Carnrite Group, Pearl Investment Company and Epic Integrated Solutions
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 management.
As of the date of this prospectus Epic's revenues from the sale of oil
and gas were not significant.
Epic's offices are located at 1450 Lake Robbins Drive, Suite 160, 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.
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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 15,954,545 shares
of Epic's common stock. The warrants are exercisable at a price of $1.65 per
share and expire on December 5, 2012.
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. 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 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 June 30, 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
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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,
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. During the
year ended December 31, 2007 and the three months ended March 31, 2008 Epic had
losses of $(4,382,716) and $(1,262,124) respectively. As of March 31, 2008 Epic
had an accumulated deficit of $(9,713,366)
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 COULD RESULT IN A SUBSTANTIAL
DECLINE IN EPIC'S CONSOLIDATED REVENUES. As discussed in the "Business" section
of this prospectus, during the year ended December 31, 2007 and the three months
ended March 31, 2008, a small number of customers accounted for a significant
amount of the total revenues of Pearl Investment Company, The Carnrite Group and
Epic Integrated Solutions. The loss of any significant customers of any of
Epic's subsidiaries could have a material adverse impact on the consolidated
operating results of Epic.
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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.
IF EPIC'S EXPANSION EFFORTS ARE NOT SUCCESSFUL, ITS OPERATIONS WILL BE ADVERSELY
AFFECTED. Epic recently acquired three energy consulting firms and, although it
has no present plans to do so, 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 three 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.
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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.
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 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.
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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
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.
EPIC MAY LOSE ITS INTEREST IN ITS KANSAS GAS WELLS IF IT DOES NOT RESUME AND
MAINTAIN PRODUCTION FROM THESE WELLS. Epic owns 58 gas wells in Rush County,
Kansas. The wells have been shut in since January 2007 due to the closure of a
plant which was purchasing the gas produced from the wells. Although Epic
expects that production from the wells will resume in August 2008, Epic will
need to maintain production from the wells to keep the leases on which the wells
are located from expiring. If the leases, covering 28,600 acres, on which the
wells are located expire, Epic will lose all proven gas reserves associated with
those leases. As of December 31, 2007 the net present value of the gas reserves
on these leases was approximately $2,126,000.
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
9
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 June 30,
2008, allow the holders to acquire up to approximately 25,250,000 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.
COMPARATIVE SHARE DATA
Number of Note
Shares Reference
Shares outstanding as of June 30, 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 June 30, 2008:
Number of Note
Shares Reference
Shares issuable as payment of principal on notes 21,875,000 C
Shares issuable upon the exercise of warrants
held by private investors 963,600 D
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Shares issuable upon exercise of options granted
to Epic's officers, employees and directors 1,611,000 E
Shares to be issued to officers and employees
of Pearl Investment Company 3,313,760 F
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 15,954,545
shares of Epic's common stock. The warrants are exercisable at a price of $1.65
per share and expire on December 5, 2012.
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.
Beginning December 1, 2008 Epic is required to make quarterly payments of
$1,265,625 toward the principal amount of the notes. At Epic's election, and
under certain conditions, 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 volume weighted average of the trading price of Epic's common stock for the
ten consecutive trading days prior to the applicable payment date.
By means of this prospectus, Epic may use 6,200,000 shares of common stock
to make principal payment on the notes. See Note C below with respect to the use
of more than 6,200,000 shares to make principal payments. The number in the
table is an estimate and assumes that Epic makes principal payments of
approximately $5,000,000, with shares of its common stock having a price of
$0.80 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
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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. In December 2007 Epic sold notes in the principal amount of $20,250,000
to a group of private investors. As mentioned in Note A, Epic may use shares of
its common stock to make principal payments on the notes. However, only the
6,200,000 shares referred to in Note A may be resold by means of this
prospectus. If Epic uses the 6,200,000 shares referred to in Note A to make
principal payments of approximately $5,000,000, a total of $15,250,000,
excluding interest, would remain outstanding on the notes. Assuming:
o Epic pays the remaining principal with shares of its common stock; and
o the volume weighted average for Epic's common stock is $0.80 per share
at the time Epic uses its common stock to make principal payments on
the notes
Epic would issue approximately 21,875,000 additional shares in payment of the
remaining principal amount of the notes. Epic will rely upon the exemption
provided by Section 4(2) of the Securities Act of 1933 if it issues additional
shares to repay the notes and these additional shares may not be sold by means
of this prospectus.
D. 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.
E. See "Management - Executive Compensation" for information concerning the
terms of these options.
F. On December 5, 2007, Epic acquired Pearl Investment Company for 1,786,240
shares of its common stock and cash of $19,020,000. 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 1,786,240 shares of its common stock and
$19,020,000 in cash.
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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 $1,400,000 will be
paid to the three owners in periodic installments during 2008 and 2009.
The Carnrite Group, Pearl Investment Company and Epic Integrated
Solutions 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.
Because Epic had minimal operations until the acquisition of Carnrite in
August 2007, Epic's historical operating results and period to period
comparisons are not significant until 2007. All increases in Epic's revenues and
expenses between 2007 and 2006 are associated with the acquisitions of Carnrite
and the Pearl Investment Company. Refer to the pro forma financial statements
included in "Notes to the Consolidated Financial Statements - Note 3 Business
Combinations" which includes the results of operations had Carnrite and Pearl
been acquired as of January 1, 2006. The results for 2007 contain the historical
results of Carnrite from July 1 through December 31 and Pearl from December 1
through December 31 and may not be indicative of future operating results.
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.
Three Months Ended March 31, 2008
Revenues were $17,473,868 for the quarter ended March 31, 2008 compared with
revenues of $75,584 for the quarter ended March 31, 2007. The increase of
$17,398,284 was primarily the result of the acquisitions of Carnrite in August
2007 and Pearl in December 2007.
Operating Expenses were $17,360,760 for the quarter ended March 31, 2008
compared with $497,314 for the quarter ended March 31, 2007 resulting in an
increase of $16,863,446. This increase was primarily the result of the
acquisitions of Carnrite in August 2007 and Pearl in December 2007.
13
Income from Operations was $113,108 for the quarter ended March 31, 2008
compared with a loss from operations of $(421,730) for the quarter ended March
31, 2007 resulting in increased income of $534,838. This increase was primarily
the result of the acquisitions of Carnrite in August 2007 and Pearl in December
2007. One of the reasons for the minimal net income in 2008 was an additional,
unexpected increase in the number of hours to complete a fixed price project.
Other Income (Expense) was $(1,375,232) for the quarter ended March 31, 2008
compared with $(29,974) for the quarter ended March 31, 2007, an increase of
$1,345,258. The increase was primarily due to interest expense and debt discount
amortization associated with notes sold to fund the acquisition of Pearl in
December of 2007.
Net Loss was $(1,262,124) or $(0.03) per share for the quarter ended March 31,
2008 compared with $(451,704) or $(0.01) per share for the quarter ended March
31, 2007 resulting in an increased loss of $810,420. One of the primary reasons
for the net loss in 2008 was the $1,399,972 of interest expense for the first
three months of 2008.
Year Ended December 31, 2007
Revenues were $8,470,696 for the year ended December 31, 2007 as compared
to $106,263 for the year ended December 31, 2006, an increase of $8,364,433.
This increase was due to the acquisitions of Carnrite in August 2007 and Pearl
in December 2007.
Operating Expenses were $12,236,495 for the year ended December 31, 2007
as compared to $4,079,565 for the year ended December 31, 2006, an increase of
$8,156,930. This increase was due to the acquisitions of Carnrite in August 2007
and Pearl in December 2007 and increased lease operating expenses of
approximately $324,000, partially offset by a decrease in impairment of oil and
gas properties of approximately $896,000.
Loss from Operations was $3,765,799 for the year ended December 31, 2007
as compared to $3,973,302 for the year ended December 31, 2006, a decrease of
$(207,503). Because significant operations commenced in 2007 with the
acquisitions of Carnrite and Pearl, no comparison can be made between the
periods.
Other Income (Expense) was $(596,917) for the year ended December 31,
2007 as compared to $3,088 for the year ended December 31, 2006. The increase in
Other Expense was due to interest expense and debt discount amortization on the
$20,250,000 debentures that were sold on December 5, 2007.
Net Loss was $(4,382,716) or $(0.11) per share for the year ended December
31, 2007 as compared to $(3,970,214) for the year ended December 31, 2006, an
increase of $412,502. Because significant operations commenced in 2007 with the
acquisitions of Carnrite and Pearl, no comparison can be made between the
periods.
Year Ended December 31, 2006
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 and had
14
a loss of $3,970,214, resulting primarily from the impairment of its oil and gas
properties and general and administrative expenses associated with commencing
operations during 2006. During the year ended December 31, 2005, Epic, did not
have any operations. As a result, a comparison of operations for the year ended
December 31, 2006 with the year ended December 31, 2005 is not meaningful.
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
15
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;
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.
Epic Integrated Solutions
Year Ended December 31, 2006
Revenues were $1,117,414 for the year from March 29, 2006 (inception)
through December 31, 2006. The company commenced in 2006 thus there is no basis
for comparison.
Operating expenses were $752,258 for the year from March 29, 2006
(inception) through December 31, 2006. The company commenced in 2006 thus there
is no basis for comparison.
Net income was $365,156 for the year from March 29, 2006 (inception)
through December 31, 2006. The company commenced in 2006 thus there is no basis
for comparison.
Year Ended December 31, 2007
Revenues were $2,903,178 for the year ended December 31, 2007 as compared
to $1,117,414 for the year from March 29, 2006 (inception) through December 31,
2006 an increase of $1,785,764 or 61.5%. Revenues increased due to a general
increase in business.
Operating expenses were $2,204,155 for the year ended December 31, 2007 as
compared to $752,258 for the year from March 29, 2006 (inception) through
December 31, 2006, an increase of $1,451,897 or 65.9%. Net Income was $698,998
or 24.1% of revenue for the year ended December 31, 2007 as compared to $365,156
or 32.7% of revenue for the year from March 29, 2006 (inception) through
December 31, 2006. Net income increased due to a general increase in business.
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
16
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 (19,020,000)
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 $ 3,559,119
===========
Epic's sources and (uses) of cash during the years ended December 31, 2007
and 2006 were:
2007 2006
---- ----
Cash used by operations $(2,667,176) $(595,807)
Investment in Epic Exploration and Development (22,700) --
Investment in oil and gas properties (301,777) (102,100)
Cash resulting from acquisition of Carnrite 48,727 --
17
Acquisition of Pearl Investment Company,
net of cash received (20,371,822) --
Borrowings, net of repayments and issuance costs 17,503,607 --
Sale of common stock 8,667,103 903,195
Capital contribution -- (304,221)
Increase in restricted cash (3,400,003) --
Bank overdrafts 3,441,949 --
Other (4,901) --
Epic's sources and (uses) of cash during the three months ended March 31,
2008 and 2007 were:
2008 2007
---- ----
Cash provided (used) by operations $3,728,448 $(350,390)
Decrease in restricted cash 1,000,003 --
Purchase of equipment (572,795) --
Cash from acquisition of Epic
Integrated Solutions 35,037 --
Decrease in bank overdraft (2,815,101) --
Increase in other assets (191,810) --
Borrowings (net of repayments) 4,631 (42,184)
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 years
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 --
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) --
18
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.
Epic Integrated Solutions sources and (uses) of cash during the year ended
December 31, 2007 and the period from March 29, 2006 (inception) through
December 31, 2006 were:
Cash provided by operations $625,248 $315,819
Purchase of equipment (112,130) (36,814)
Contributions from (distributions to)
owners (156,000) 4,000
During the year ended December 31, 2007 The Carnrite Group, the Pearl
Investment Company and Epic Integrated Solutions had net income of $2.2 million,
$1.9 million and $0.7 million respectively. During the three months ended March
31, 2008 The Carnrite Group and Pearl Investment Company had combined net income
of approximately $1,860,000. During this same three-month period Epic Integrated
Solutions had a net loss of approximately $(253,000).
Epic's material future contractual obligations as of December 31, 2007 are
shown below:
Operating Capital
Leases Leases Debt Total
2008 $ 941,280 $1,055,303 $2,152,832 $ 4,149,415
2009 842,004 889,796 6,032,440 7,764,240
2010 731,156 481,893 6,885,216 8,098,265
2011 589,009 363,630 5,082,671 6,035,310
2012 246,303 388,149 3,807,282 4,441,734
Thereafter - 2,876,449 - 2,876,449
---------- ---------- ----------- -----------
Total $3,349,752 $6,055,220 $23,960,441 $33,365,413
========== ========== =========== ===========
Except for the $1,400,000 of debt incurred in connection with the
acquisition of Epic Integrated Solutions, there were no material changes to
Epic's contractual commitments during the three months ended March 31, 2008.
Other than the operating leases, as of December 31, 2007 and as of the
date of this prospectus Epic did not have any off balance sheet arrangements.
19
Epic's loan from the private lender had a principal balance of $2,920,867
as of March 31, 2008 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 were shut in as of June 30, 2008, it is anticipated that $25,000
will be added to the note principal each month until the wells return to
production. The Kansas wells are expected to return to production in August
2008.
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.
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.
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:
Revenue Recognition. Revenues from oil and gas production sales 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 collection
is reasonably assured.
Revenue from consulting services is recognized from 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.
20
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.
Revenues from lump-sum turn-key contracts are 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.
Accounts Receivable. Accounts receivable represents 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 collectability
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. If the collection history or aging of accounts receivable
deteriorates, Epic may have to record a charge to allowance for doubtful
accounts.
Historically Epic has not experienced collectability problems even though
a customer of Pearl Investment, which owed Pearl approximately $1,200,000, filed
for Chapter 11 bankruptcy in the first quarter of 2008. As a result of this
bankruptcy filing, Epic recorded an allowance for doubtful accounts of $636,000
on its December 31, 2007 balance sheet.
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
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
21
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:
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.
22
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.
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.
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
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.
23
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.
Stock-Based Compensation. Epic adopted FAS 123R on January 1, 2006 which
requires the measurement and recognition of compensation expense for all
share-based awards made to employees and directors, including stock options,
restricted stock and employee stock purchases related to employee stock purchase
plans, based on estimated fair values. SFAS No. 123(R) requires companies to
estimate the fair value of share-based awards on the grant date using an option
pricing model. Epic values share-based awards using the Black-Scholes option
pricing model. The Black-Scholes model is highly complex and dependent on key
estimates by management. The estimates with the greatest degree of subjective
judgment are the estimated lives of the stock-based awards and the estimated
volatility of Epic's stock price.
Income Taxes. Epic uses the asset and liability method of accounting for
income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement and tax
bases of assets and liabilities. If appropriate, deferred tax assets are reduced
by a valuation allowance which reflects expectations of the extent to which such
assets will be realized. As of December 31, 2007, 2006 and 2005, Epic had
recorded a full valuation allowance for its net deferred tax asset.
On January 1, 2007, Epic adopted the provisions of FIN 48, "Accounting for
Uncertainty in 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. FIN 48 requires
that Epic recognize in its consolidated financial statements only those tax
positions that are "more-likely-than-not" of being sustained as of the adoption
date, based on the technical merits of the position. The adoption of FIN 48 did
not have a material impact on Epic's operating results.
Per Share Information. Basic earnings (losses) per share is computed by
dividing net income (losses) from continuing operations attributable to common
stock by the weighted average number of common shares outstanding during each
period. Diluted earnings per share is computed by adjusting the average number
of common shares outstanding for the dilutive effect, if any, of common stock
equivalents such as stock options and warrants. Diluted net loss per share is
the same as basic net loss per share for all periods presented because potential
common stock equivalents were anti-dilutive. For all periods in which there was
a net loss attributable to common stockholders, all of Epic's stock options and
warrants were anti-dilutive. Common stock equivalents of 23,828,961, and
1,143,143 at December 31, 2007 and 2006, respectively, were excluded because
they were anti-dilutive due to the net loss attributable to common stockholders
incurred in such periods.
24
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
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. FASB Staff
Position No. FAS 157-2 (FSP 157-2), issued in February 2008, delayed the
effective date of FAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008. Epic adopted FAS No. 157 effective
January 1, 2008, with the exceptions allowed under FSP 157-2, the adoption of
which has not affected its financial position or results of operations.
25
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.
In December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations," which requires the acquiring entity in a business combination to
recognize and measure all assets and liabilities assumed in the transaction and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. SFAS No. 141 (R) also establishes guidance for the measurement of the
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting treatment
pre-acquisition gain and loss contingencies, the treatment of acquisition
related transaction costs, and the recognition of changes in the acquirer's
income tax valuation allowance and deferred taxes. SFAS No. 141(R) is effective
for fiscal years beginning after December 15, 2008 and is to be applied
prospectively as of the beginning of the fiscal year in which the statement is
applied. Early adoption is not permitted. SFAS No. 141(R) will be effective for
Epic beginning with the 2009 fiscal year.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements -- an amendment of ARB 51," which establishes
accounting and reporting standards that require noncontrolling interests to be
reported as a component of equity. SFAS No. 160 also requires that changes in a
parent's ownership interest while the parent retains its controlling interest be
accounted for as equity transactions and that any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary be initially measured at
fair value. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008 and is to be applied prospectively as of the beginning of the fiscal
year in which the statement is applied. SFAS No. 160 will be effective for Epic
beginning with the 2009 fiscal year. Epic is evaluating the potential impact of
SFAS No.160, if any, on its financial statements.
26
MARKET FOR EPIC'S COMMON STOCK
As of April 30, 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
March 31, 2008 $ 0.69 $ 0.64
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.
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.
27
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 $8,144,003,
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.
Unless otherwise indicated, all references to Epic include the operations
of the Carnrite Group, Pearl Investment Company and Epic Integrated Solutions,
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
28
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.
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 1,786,240
shares of its common stock and cash of $19,020,000. 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.
29
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 $1,400,000 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
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 March 31, 2008, Epic's backlog for consulting services to be provided
in the future was approximately $43.5 million. As of March 31, 2007 Epic did not
have any backlog since the Pearl Investment Company, The Carnrite Group and Epic
Integrated Solutions were not acquired until after March 31, 2007.
30
During the three months ended March 31, 2008:
o four customers accounted for 98% of the total revenues of The Carnrite
Group;
o four customers accounted for 75% of Pearl Investment Company's total
revenues; and
o two customers accounted for all of Epic Integrated Solutions total
revenues.
During the year ended December 31, 2007:
o five customers accounted for 83% of the total revenues of The Carnrite
Group;
o two customers accounted for 82% of the total revenues of Pearl
Investment Company; and
o One customer accounted for 87% of the total revenues of Epic
Integrated Solutions.
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. In May 2008, the operator of these wells
signed a gas purchase agreement with IACX Energy, LLC. Epic expects that its
Kansas wells will return to production in August 2008.
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 third quarter of 2008.
31
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 or
during the three months ended March 31, 2008.
The following table shows, as of March 31, 2008, 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 March 31, 2008 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
32
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 periods presented.
Production Data:
Three Year
Months Ended Ended December
March 31, 2008 2007 2006
---- ----
Production -
Oil (Bbls) -- -- 14,879
Gas (Mcf) -- -- --
Average sales price -
Oil (Bbls) -- -- $5.02
Gas (Mcf) -- --
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.
33
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
as general corporate overhead. Present values were computed by discounting
future net revenues by 10% per year.
December 31, 2007
Oil Gas
(Bbls) (Mcf)
Proved reserves 3,965 4,961,457
Estimated future net cash flows from proved
oil and gas reserves $ 10,225,690
Present value of future net cash flows from
proved oil and gas reserves $ 5,153,686
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
34
continued to regulate the maximum selling prices of certain categories of gas
sold in "first sales" in interstate and intrastate commerce.
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.
35
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
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.
36
General
As of June 30, 2008, Epic and its subsidiaries, the Carnrite Group, Pearl
Investment Company and Epic Integrated Solutions, had approximately 220 full
time employees.
Epic's offices are located at 1450 Lake Robbins Drive, Suite 160, The
Woodlands, Texas 77380. The approximate 4,500 square feet of office space is
occupied under the lease requiring rental payments of $12,500 per month. The
lease on this space expires in April 2013.
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.
The offices of Epic Integrated Solutions are located at 1707 Post Oak
Blvd., Suite 190, Houston, Texas 77056. The 3,130 square feet of office space is
occupied under the lease requiring rental payments of $5,086 per month. The
lease on this space expires in December 2009.
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
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
37
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.
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.
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.
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
38
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.
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 a Vice President of Epic in December 2007
following Epic's acquisition of the Pearl Investment Company. Between 1994 and
May 2008 R. Bret Rhinesmith was the President of the Pearl Investment Company
and its predecessor companies. Mr. Rhinesmith resigned as an officer of Epic in
May 2008 and since that time has been a consultant to Epic.
39
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.
The officers of Pearl Investment Company are:
Name Age Position
Mona Walker 41 Chief Financial Officer
Curtis L. Good 48 Vice President
As of the date of this prospectus Pearl Investment Company did not have a
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.
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.
The managing directors of Epic Integrated are:
Name Age
Joseph Wright 27
Richard Dean Harvey 47
Traci Marlene Harvey 46
40
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.
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 2006 $105,625 -- -- $101,439 -- $ 207,064
R. Bret Rhinesmith, 2007 $343,264 $300,000 -- -- $12,917 $ 656,181
President of Pearl 2006 $156,398 -- -- -- -- $ 156,398
Investment Company
Patrick Murray 2007 $205,192 $500,000 -- -- $ 9,587 $ 714,779
President of Pearl 2006 $ 76,154 $ 85,000 $ 477 $ 161,631
Development Company
(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.
41
(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.
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 2007. Mr. Rhinesmith was the President of Pearl Investment
Company between 1994 and May 2008. Mr. Murray was employed by Pearl Development
Company between 2006 and May 2008.
Epic does not have an employment agreement with any of its officers. Epic
has a consulting agreement with R. Bret Rhinesmith which provides that Mr.
Rhinesmith will be paid $30,000 every three months for providing up to 150 hours
of services to Epic during the three month period. If Epic requires Mr.
Rhinesmith to provide more than 150 hours during the three month period, Mr.
Rhinesmith will be paid $250 for each additional hour of consulting services.
The consulting agreement may be terminated upon 30 days notice by either party.
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 of 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:
42
Name of Employee Annual Salary
Mona L. Walker $175,000
Curtis L. Good $220,000
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.
43
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.
Compensation of Directors During Year Ended December 31, 2007
Stock
Name Paid in Cash Awards (1) Option
- ---- ---------------------------- -------
Awards (2) Total
- ---------- -----
Robert Eissler $500 -- -- $500
Dr. Robert Ferguson $500 -- -- $500
Kevin McMahon -- (3) -- --
(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.
(3) Kevin McMahon was entitled to receive 17,000 shares for his services as a
director during 2007. However, the certificate for these shares was not
issued until June 2008.
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 its 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.
44
Summary. The following is a summary, as of June 30, 2008, 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.
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 (1) Price Date
---- ----------- ----------------- -------- ----------
Rex Doyle 100,000 $0.50 10/24/08
Rex Doyle 100,000 $3.00 10/24/08
John Ippolito 100,000 $0.50 10/24/08
John Ippolito 100,000 $3.00 10/24/08
David Reynolds 100,000 $0.50 10/24/08
David Reynolds 100,000 $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
(1) Options can be exercised after December 12, 2009.
As of June 30, 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.
45
Number of Securities
Number Remaining Available
of Securities For Future Issuance
to be Issued Weighted-Average Under Equity
Upon Exercise Exercise Price of 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
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, persons named in the
executive compensation table, and those shareholders owning more than 5% of
Epic's common stock as of June 30, 2008.
Shares of
Name and Address Common Stock (1) Percent of Class
- ---------------- ---------------- ------------------
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
46
Shares of
Name and Address Common Stock (1) Percent of Class
- ---------------- ---------------- ------------------
Michael Kinney 97,000 *
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
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 17,000 *
717 Texas Avenue, Suite 1000
Houston, TX 77002
R. Bret Rhinesmith 1,075,000 2.4%
7110 Jefferson Ave.
Lakewood, CO 80235
Patrick W. Murray 75,000 *
6300 E. Irwin Pl.
Centennial, CO 80112
All Executive Officers 19,547,000 44.4%
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
47
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 prior to September 30,
2008.
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 --
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. 1,000,000 6,318,184 2,066,670 9,384,854 --
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 --
48
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 --
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 --
49
(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".
(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
50
Midsummer Investment, Ltd. Alisa Butchkowski
Castex New Ventures, L.P. Alan G. Carnrite
Continental American Resources, Inc. Carl Suter
Selling Shareholder Controlling Person
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
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.
51
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.
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.
52
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.
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 for the
payment of dividends 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.
53
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.
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 15,954,545 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. 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.
54
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.
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.;
55
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.
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.
56
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;
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.
57
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.
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
58
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 to be issued in
payment of principal will be determined by dividing the
amount to be paid by a price equal to 90% of the volume
weighted average of the trading price of Epic's common
stock for the ten consecutive trading days prior to the
applicable payment date. For purposes of this calculation,
the number of shares was determined by dividing $20,250,000
by $2.835, which was 90% of the closing price on December
5, 2007. 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. 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 of 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: 15,945,853
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
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
59
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.
During the twelve months ending December 4, 2008 Epic will make mandatory
principal payments of $1,265,625 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:
60
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 1,301,151 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. Of the warrants issued to Rodman &
Renshaw, 183,333 warrants are exercisable at a price of $1.50 per share, and
1,116,818 warrants 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
LEGAL MATTERS
The validity of the securities offered by this prospectus has been passed
upon by Hart & Trinen, Denver, Colorado.
61
EXPERTS
Effective February 21, 2007 Epic replaced (i.e. dismissed) Comiskey &
Company with Malone & Bailey PC 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.
During the two most recent fiscal years and subsequent interim period ended
February 21, 2007, Epic did not consult with Malone & Bailey PC 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, 2007 and
for each of the two years ended December 31, 2007 included in this prospectus
have been audited by Malone & Bailey 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.
The financial statements of the Carnrite Group, LLC as of June 30, 2007 and
for the period ended June 30, 2007, included in this prospectus have been
audited by Malone & Bailey 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.
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, included 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.
The financial statements of Epic Integrated Solutions LLC as of December
31, 2007 and for the year ended December 31, 2007 and the period ended December
31, 2006 included in this prospectus have been audited by Malone & Bailey 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.
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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.
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EPIC ENERGY RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS
Epic Energy Resources F-1
The Carnrite Group F-30
Pearl Development Company F-42
Epic Integrated Solutions L.L.C. F-65
Pro Forma Financial Statements F-76
Interim Financial Statements F-81
EPIC ENERGY RESOURCES
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006.
Consolidated Statements of Operations for the years ended December 31,
2007 and 2006.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2007 and 2006.
Consolidated Statements of Cash Flows for the years ended December 31,
2007 and 2006.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Epic Energy Resources, Inc.
The Woodlands, Texas
We have audited the accompanying consolidated balance sheets of Epic Energy
Resources, Inc. (Epic) as of December 31, 2007 and 2006 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2007 and 2006. These consolidated 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 an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. Epic is not required to have, nor
were we engaged to perform an audit of its internal controls over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of Epic's internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Epic as of December
31, 2007 and 2006 and the results of operations and cash flows for the years
ended December 31, 2007 and 2006 in conformity with accounting principles
generally accepted in the United States of America.
/s/ MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas
April 9, 2008
F-2
EPIC ENERGY RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
ASSETS 2007 2006
---- ----
CURRENT ASSETS
Cash and cash equivalents ......... $ 3,483,179 $ 590,172
Restricted cash .................. 3,400,003 -
Accounts receivable:
Billed, net of allowance of $636,000
and $0, respectively 11,334,690 4,600
Unbilled, at estimated net realizable
value ............... 3,446,757 -
Accounts receivable - other ............. 639,500 -
Prepaid expenses and other .............. 309,081 120,219
-------------- --------------
TOTAL CURRENT ASSETS 22,613,210 714,991
Oil and gas properties (full cost method),
net of accumulated impairments and depletion
of $5,259,845 and $3,093,079, respectively:
Proved ................................ 5,247,746 7,354,511
Unproved .............................. - 60,000
Other mineral reserves ................... 783,474 783,474
Property and equipment, net of accumulated
depreciation of $112,119................. 10,596,463 -
Other assets ............................. 209,213 -
Debt issuance costs, net of accumulated
amortization of $28,650 ................. 1,690,350 -
Goodwill and intangible assets, net of
accumulated amortization of $4,902 ...... 33,609,064 -
-------------- --------------
TOTAL ASSETS ...................... $ 74,749,520 $ 8,912,976
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................... $ 4,066,368 $ 97,630
Bank overdrafts ........................ 3,441,949 -
Accrued liabilities .................... 2,949,270 7,346
Customer deposits ...................... 1,357,862 -
Current portion of long term debt....... 2,152,832 872,990
Current portion of capital leases....... 1,055,303 -
-------------- --------------
TOTAL CURRENT LIABILITIES 15,023,584 977,966
Asset retirement obligations ............. 132,626 142,343
Long-term debt, net of current portion and
debt discount of $12,878,572 ............ 8,929,037 1,707,676
Capital leases, net of current portion.... 4,999,917 -
-------------- --------------
TOTAL LIABILITIES........... 29,085,164 2,827,985
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, no par value: 100,000,000
authorized; 42,948,921 and 53,441,601
shares issued and outstanding at
December 31, 2007 and December 31, 2006,
respectively ... 40,698,806 9,822,605
Additional paid-in capital.............. 13,416,792 330,912
Accumulated deficit .................... (8,451,242) (4,068,526)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY ............... 45,664,356 6,084,991
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,749,520 $ 8,912,976
============== ==============
See accompanying notes to consolidated financial statements.
F-3
EPIC ENERGY RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------
2007 2006
---- ----
REVENUES
Consulting fees .................... $ 8,461,022 $ 33,190
Oil and gas revenue ................ 9,674 73,073
-------------- -------------
TOTAL REVENUES ................ 8,470,696 106,263
OPERATING EXPENSES
General and administrative........ 3,857,958 926,301
Lease operating expenses.......... 383,280 59,460
Professional and subcontracted services 1,127,293 -
Compensation and benefits......... 2,152,067 -
Reimbursed expenses .............. 2,103,522 -
Occupancy, communication and other .... 319,376 -
Depreciation, depletion and amortization .. 117,021 30,814
Accretion expense ................. 9,212 725
Impairment of oil and gas properties .... 2,166,766 3,062,265
-------------- -------------
OPERATING EXPENSES ............ 12,236,495 4,079,565
LOSS FROM OPERATIONS ................. (3,765,799) (3,973,302)
OTHER INCOME (EXPENSE)
Interest and other income 13,328 3,519
Interest expense .................. (610,245) (431)
-------------- -------------
OTHER INCOME (EXPENSE) ........ (596,917) 3,088
NET LOSS BEFORE INCOME TAXES......... $ (4,362,716) $ (3,970,214)
Provision for income taxes 20,000 -
-------------- -------------
NET LOSS ............................. $ (4,382,716) $ (3,970,214)
============== =============
LOSS PER COMMON SHARE - Basic and Diluted $ (0.11) $ (0.10)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - Basic and Diluted ...... 38,946,918 38,045,590
See accompanying notes to consolidated financial statements.
F-4
EPIC ENERGY RESOURCES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------
BALANCE, December
31, 2005 5,260,000 $ 68,000 $ 26,691 $ (98,312) $ (3,621)
=============================================================
Shares issued for cash 44,902,755 903,195 304,221 - 1,207,416
Shares issued for
services ......... 75,000 57,094 - - 57,094
Shares issued for Kansas
properties ...... 3,200,000 8,480,000 - - 8,480,000
Shares issued for Oklahoma
properties ..... 3,846 10,000 - - 10,000
Stock option compensation
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
==============================================================
Amortization of shares
issued for compensation - 184,672 - - 184,672
Amortization of stock
options and stock bonus - 76,891 - - 76,891
Shares retired by
officers and other (23,230,655) (23,741) - - (23,741)
Shares issued for
services 43,500 127,100 500 - 127,600
Shares issued for
cash to private
investors 564,500 523,100 - - 523,100
Shares issued for the
acquisition of
Carnrite 4,914,400 16,217,520 - - 16,217,520
Shares issued for the
acquisition of
Pearl 1,786,240 5,626,656 - - 5,626,656
Sale of stock and
warrants via
private placement 5,429,335 8,144,003 - - 8,144,003
Sale of debentures and
warrants - - 13,085,380 - 13,085,380
Net loss for the year
ended December
31, 2007 - - - (4,382,716) (4,382,716)
--------------------------------------------------------------
BALANCE, December 31,
2007 42,948,921 $40,698,806 $13,416,792 (8,451,242) $45,664,356
==============================================================
See accompanying notes to consolidated financial statements.
F-5
EPIC ENERGY RESOURCES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2007 2006
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,382,716) $(3,970,214)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 145,671 30,814
Impairment of oil and gas properties 2,166,765 3,062,265
Accretion expense 9,212 725
Shares issued for compensation 364,922 361,410
Imputed interest on acquisition 115,000 -
Amortization of debt discount 206,808 -
Amortization of prepaid assets 120,219 -
Changes in operating assets and liabilities:
Accounts receivable 1,133,983 (4,600)
Prepaid expenses and other (11,808) (120,219)
Accounts payable (2,276,339) 44,012
Accrued liabilities (258,893) -
------------- -------------
Net cash used in operating activities (2,667,176) (595,807)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in joint venture (22,700) -
Increase in restricted cash (3,400,003) -
Acquisition of oil and gas properties and
property and equipment (301,777) (102,100)
Acquisition of Carnrite, net of cash received 48,727 -
Acquisition of Pearl, net of cash received (20,371,822)
Increase in other assets (4,901)
------------- -------------
Net cash used in investing activities (24,052,476) (102,100)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdrafts 3,441,949 -
Payments on debt (2,162,000) (24,089)
Proceeds from debt 21,384,607 104,752
Debt issuance costs (1,719,000) -
Net proceeds from issuance of common stock 8,667,103 903,195
Capital contributed by stockholders - 304,221
------------- -------------
Net cash provided by financing activities 29,612,659 1,288,079
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,893,007 590,172
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 590,172 -
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,483,179 $ 590,172
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 5,978 $ -
Income taxes paid $ - $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Oil and gas properties acquired with
common stock $ - $ 8,480,000
Note payable for oil and gas properties $ 193,777 $ 1,707,673
Acquistion of Pearl with stock $ 5,626,656 $ -
Acquisition of Carnrite with stock $ 16,217,520 $ -
See accompanying notes to consolidated financial statements.
F-6
EPIC ENERGY RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations
Epic Energy Resources, Inc ("Epic") was formed in April 2006, completed a
purchase of a public shell and began trading under the ticker symbol EPCC.OB in
September 2006. Epic acquired certain oil and gas properties in December of 2006
and January 2007. In August 2007, Epic acquired The Carnrite Group ("Carnrite"),
an engineering consulting firm focused on the energy industry. In December 2007,
Epic acquired Pearl Development Group and its subsidiaries ("Pearl"), also an
engineering firm focused on the energy industry. Epic was in the development
stage until the acquisition of Carnrite in August 2007. As a result, 2007 is the
first year during which the Company is no longer in the development stage.
Epic is engaged primarily in providing engineering, construction management,
operations, maintenance, field and project management services to the oil, gas
and energy industry. Epic is also engaged in the acquisition, exploration,
development, production, and sales of oil, gas and natural gas liquids.
2. Summary of Significant Accounting Policies
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.
Principles of consolidation. The consolidated financial statements include the
accounts of Epic and its controlled subsidiaries. Equity investments in which
the Company exercises significant influence, but do not control and are not the
primary beneficiary, are accounted for using the equity method of accounting.
Investments in which we do not exercise significant influence over the investee
are accounted for using the cost method of accounting. Intercompany transactions
are eliminated.
Cash and Cash Equivalents. Cash equivalents include demand deposits and money
market funds for purposes of the statements of cash flows. The Company considers
all highly liquid monetary instruments with original maturities of three months
or less to be cash equivalents.
Restricted Cash. The Company had restricted cash in the amount of $3.4 million
as of December 31, 2007, all of which was classified as current. Of the $3.4
million, $2.4 million was held in escrow to pay income taxes for the former
owners of Pearl and $1 million was held in escrow at year end related to sales
of common stock. The Company has chosen to report this restricted cash in
investing activities of its Statements of Cash Flows.
F-7
Accounts Receivable. Accounts receivable represent amounts due from customers
for services performed. Unbilled receivables represent revenue earned in the
current period but not billed to the customer until future dates, usually within
one month. Epic extends various terms to its customers, with payment terms
generally 30 days, depending on the customer and country, and does not require
collateral. Epic periodically assesses the collectability 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 Company provides for an allowance for
doubtful accounts equal to the estimated uncollectible amounts.
Business Combinations. Our business combinations are accounted for in accordance
with the provisions set forth in Statement of Financial Accounting Standards, or
SFAS, No. 141, Business Combinations, whereby the tangible and separately
identifiable intangible assets acquired and liabilities assumed are recognized
at their estimated fair market values at the acquisition date. The portion of
the purchase price in excess of the estimated fair market value of the net
tangible and separately identifiable intangible assets acquired represents
goodwill. The allocation of the purchase price related to our business
combinations involves estimates and judgments by our management that may be
adjusted during the allocation period, but in no case beyond one year from the
acquisition date. These allocations are made based on management's best
estimates and assumptions. In arriving at the fair values of assets acquired and
liabilities assumed, we consider the following generally accepted valuation
approaches: the cost approach, income approach and market approach. Our
estimates may also include assumptions about projected growth rates, cost of
capital, effective tax rates, tax amortization periods, technology royalty rates
and technology life cycles, the regulatory and legal environment, and industry
and economic trends.
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 and use of the full
cost method. We have chosen to follow the full cost method under which all costs
associated with property acquisition, exploration and development are
capitalized. We also capitalize 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. As a result our financial statements will differ from companies that
apply the successful efforts method since we 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 us 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. Our crude oil and natural gas
reserves have a relatively long life. However, temporary drops in commodity
prices can have a material impact on our business including impact from the full
cost method of accounting.
F-8
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, based upon a 10% discount rate, of the future net cash flows from
proved crude oil and natural gas reserves calculated using constant prices based
upon pricing in effect at yearend , 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, we 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 our stockholders' equity and reported
earnings. The risk that we 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 we
experience substantial downward adjustments to our 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 our proved reserves included in this report are prepared in
accordance with GAAP and SEC guidelines. The accuracy of a reserve estimate is a
function of:
o the quality and quantity of available data;
o the interpretation of that data;
o the accuracy of various mandated economic assumptions;
o and the judgment of the persons preparing the estimate.
Our proved reserve information included in this report was based on evaluations
prepared by independent petroleum engineers. Estimates prepared by other third
parties may be higher or lower than those included herein. 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 our estimated proved
reserves. In accordance with SEC requirements, we base the estimated discounted
future net cash flows from proved reserves on prices and costs on the date of
the balance sheets and a 10% discount rate. Actual future prices and costs may
be materially higher or lower than the prices and costs as of the date of the
balance sheets.
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
F-9
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).
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.
Valuation of Intangibles and Long-Lived Assets. Under SFAS No. 142, goodwill and
other intangible assets that have indefinite useful lives are not amortized but,
instead, must be tested at least annually for impairment, and intangible assets
that have finite useful lives are amortized over that life. SFAS No. 142 also
provides specific guidance for testing goodwill and other nonamortized
intangible assets for impairment. SFAS No. 142 does not allow increases in the
carrying value of reporting units that may result to be considered in our
impairment test; therefore, we may record goodwill impairments in the future,
even when the aggregate fair value of our 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 estimates and assumptions in order to
allocate goodwill to reporting units and to determine the fair value of a
reporting unit net's 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.
We review 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 our 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, we
estimate the useful lives of our long-lived assets and other intangibles. We
periodically review factors to determine whether these lives are appropriate.
Customer Deposits. Customer Deposits represent 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 are refunded to the customer
at the end of the contract.
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 with the related long-lived
F-10
asset. If the liability is settled for an amount other than the recorded amount,
a gain or loss is recognized. For all periods presented, estimated future costs
of abandonment and dismantlement are included in the full cost amortization base
and are amortized as a component of depletion expense.
Revenue Recognition. Revenues from oil and gas production sales 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 collection
is reasonably assured.
Revenue from consulting services are recognized from 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 as operating expenses..
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.
Revenues from lump-sum turn-key contracts are recognized upon achievement of
contract milestones. 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.
Financial Instruments and Concentrations of Credit Risk Our financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and debt. We believe 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.
We generally do not use derivative financial instruments to hedge exposures to
cash-flow risks or market-risks that may affect the fair values of our financial
instruments. We review our warrants and conversion features of the securities we
issue as to whether they are freestanding or contain an embedded derivative and,
if so, whether they are classified as a liability at each reporting period until
the amount is settled and reclassified into equity with changes in fair value
recognized in current earnings. We have concluded that certain warrants with
embedded conversion features in our debt that are indexed to our common stock,
are classified as equity with the offset treated as a discount on the notes.
Such financial instruments are initially recorded at fair value and amortized to
interest expense during the life of the debt.
We utilize various types of financing to fund our business needs, including debt
with warrants attached and other instruments indexed to our stock. The embedded
conversion features utilized in these instruments require an initial measurement
of the fair value of the derivative, if any. We amortize the discount associated
with these warrants to interest expense at each reporting period.
F-11
Stock-Based Compensation. We adopted FAS 123(R) upon commencement of operations,
which requires the measurement and recognition of compensation expense for all
share-based awards made to employees and directors, including stock options,
restricted stock and employee stock purchases related to employee stock purchase
plans, based on estimated fair values. SFAS No. 123(R) requires companies to
estimate the fair value of share-based awards on the grant date using an option
pricing model. We value share-based awards using the Black-Scholes option
pricing model. The Black-Scholes model is highly complex and dependent on key
estimates by management. The estimates with the greatest degree of subjective
judgment are the estimated lives of the stock-based awards and the estimated
volatility of our stock price.
Income Taxes. We use the asset and liability method of accounting for income
taxes, in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement and tax
bases of assets and liabilities. If appropriate, deferred tax assets are reduced
by a valuation allowance which reflects expectations of the extent to which such
assets will be realized. As of December 31, 2007 and 2006, we had recorded a
full valuation allowance for our net deferred tax asset.
On January 1, 2007, we adopted the provisions of FIN 48, "Accounting for
Uncertainty in 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. FIN 48 requires
that we recognize in our consolidated financial statements only those tax
positions that are "more-likely-than-not" of being sustained as of the adoption
date, based on the technical merits of the position. The adoption of FIN 48 did
not have a material impact on Epic's operating results.
Per Share Information. Basic earnings (losses) per share is computed by dividing
net income (losses) from continuing operations attributable to common stock by
the weighted average number of common shares outstanding during each period.
Diluted earnings per share is computed by adjusting the average number of common
shares outstanding for the dilutive effect, if any, of common stock equivalents
such as stock options and warrants. Diluted net loss per share is the same as
basic net loss per share for all periods presented because potential common
stock equivalents were anti-dilutive. Common stock equivalents of 23,828,961,
and 1,143,143 at December 31, 2007 and 2006, respectively, were excluded due to
their anti-dilutive effect.
Recent Accounting Pronouncements.
In September 2006, the FASB published SFAS No.157, Fair Value Measurements (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements and accordingly, does not require
any new fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Epic does not believe the adoption of SFAS
157 will have a material impact on its financial statements.
In February 2007, the FASB issued SFAS 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
F-12
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. Epic is currently assessing the impact of SFAS
159 on its financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
which requires the acquiring entity in a business combination to recognize and
measure all assets and liabilities assumed in the transaction and any
non-controlling interest in the acquiree at fair value as of the acquisition
date. SFAS No. 141 (R) also establishes guidance for the measurement of the
acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting treatment
pre-acquisition gain and loss contingencies, the treatment of acquisition
related transaction costs, and the recognition of changes in the acquirer's
income tax valuation allowance and deferred taxes. SFAS No. 141(R) is effective
for fiscal years beginning after December 15, 2008 and is to be applied
prospectively as of the beginning of the fiscal year in which the statement is
applied. Early adoption is not permitted. SFAS No. 141(R) will be effective for
us beginning with the 2009 fiscal year. We are evaluating the potential impact
of SFAS No. 141(R), if any, on our financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements -- an amendment of ARB 51," which establishes
accounting and reporting standards that require noncontrolling interests to be
reported as a component of equity. SFAS No. 160 also requires that changes in a
parent's ownership interest while the parent retains its controlling interest be
accounted for as equity transactions and that any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary be initially measured at
fair value. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008 and is to be applied prospectively as of the beginning of the fiscal
year in which the statement is applied. SFAS No. 160 will be effective for us
beginning with the 2009 fiscal year. We are evaluating the potential impact of
SFAS No. 160, if any, on our financial statements.
F-13
3. Business Combinations
On August 13, 2007, Epic acquired Carnrite for 4,850,844 shares of its common
stock valued at $16,007,785. Of these 4,850,844 shares, 1,673,034 shares were
awarded to key employees of Carnrite as retention shares. These shares will be
required to be returned to the Company if the employees 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 additional purchase price consideration. In addition, Epic issued
63,556 shares of its 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 December 31, 2007. Because the actual purchase date for Carnrite was
August 13, 2007, imputed interest in the amount of $115,000 was recorded during
2007.
On December 5, 2007, the Company acquired Pearl for 1,786,240 shares of its
common stock and cash of $19,020,000. The consolidated statement of operations
includes the operations of Pearl for the period from December 1, 2007 through
December 31, 2007.
The acquisitions and related transactions were treated as a purchase business
combination for accounting purposes, and Carnrite and Pearl's assets acquired
and liabilities assumed were recorded at their fair value. The allocations of
the purchase price to Carnrite and Pearl's assets and liabilities are only
preliminary allocations based on estimates of fair value and will change when
the actual fair values are determined. Among the provisions of SFAS No. 141,
criteria have been established for determining whether intangible assets should
be recognized separately from goodwill. The Company has not made that
determination as of December 31, 2007. The Company has one year from the date of
acquisition to make the determination.
The aggregate purchase price of Carnrite was $16,217,520 and consisted of
4,914,400 shares of common stock valued at $3.30 per share, the closing price on
the day of acquisition. The following table presents the allocation of the
acquisition cost to the assets acquired and liabilities assumed, based on fair
values:
Amount
Cash $ 48,227
Receivables from clients 1,207,883
Property and equipment 26,442
Other assets 4,901
Goodwill and intangible assets 15,603,264
--------------
Total assets acquired 16,890,717
--------------
Accounts payable (311,197)
Line of credit (362,000)
---------------
Total liabilities assumed (673,197)
---------------
Net assets acquired $ 16,217,520
=============
The aggregate purchase price of Pearl was $24,646,656 and consisted of 1,786,240
shares of common stock valued at $3.15 per share, the closing price on the day
of acquisition, and $19,020,000 of cash. The following table presents the
allocation of the acquisition cost to the assets acquired and liabilities
assumed, based on fair values:
F-14
Amount
Receivables from clients $ 15,342,447
Property and equipment 10,370,559
Other assets 453,314
Goodwill and intangible assets 18,135,506
-------------
Total assets acquired 44,301,826
-------------
Accounts payable (5,935,519)
Bank overdrafts (1,351,822)
Accrued liabilities (4,538,111)
Debt (6,329,718)
Line of credit (1,500,000)
--------------
Total liabilities assumed (19,655,170)
-------------
Net assets acquired $ 24,646,656
============
Summarized below is the unaudited pro forma statement of operations for the
years ended December 31, 2007 and 2006 had the acquisitions of Carnrite and
Pearl taken place as of January 1, 2006:
Year Ended December 31,
2007 2006
----- ----
Revenues $ 59,295,344 $ 34,717,019
Operating expenses 60,496,148 34,292,187
Other income (expense) and taxes (5,632,082) (5,035,331)
Net loss $ (6,832,886) $ (4,610,499)
------------- -------------
Net loss per share $ (0.18) $ (0.12)
------------- -------------
The unaudited 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.
4. Goodwill and Other Intangible Assets
Approximately $32.6 million of the purchase price related to the Carnrite and
Pearl acquisitions has been allocated to goodwill. Goodwill represents the
excess of the purchase price over the fair value of the net tangible assets (See
Note 3 above). In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is not amortized but instead tested for impairment at least
annually (more frequently if certain indicators are present). In the event that
management determines that the value of the goodwill has become impaired, the
company will incur an accounting charge for the amount of the impairment during
the quarter in which the determination is made. During fiscal year 2007, the
Company incurred no impairment charge related to the Goodwill associated with
the acquisitions of Carnrite and Pearl.
F-15
5. 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. 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. We based the value of the offer on a 2005
engineering reserve report which showed a value of $10.5 million. As of December
31, 2007, the Company had recorded $5,184,911 of ceiling test impairments to the
Kansas properties, including $2,122,646 of impairment in 2007 and $3,062,265 of
impairment in 2006. The Company recorded $0 and $30,814, respectively, of
depletion expense on these properties for the years ended December 31, 2007 and
2006.
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. 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.
6. Other Mineral Reserves
Our proved oil and gas properties in Kansas contain Helium reserves estimated at
between 1% and 2% of the proved gas reserves of the property. Installation of
Nitrogen Rejection Units (NRU) to harvest the helium from the field is in the
final stages of manufacturing and installation. The third party contracted to
build, install and operate the NRU units estimates the installation of the units
to be completed in May of 2008. Capital costs to build, install and operate the
NRU units will be the responsibility of the third party company in exchange for
a percentage of the produced natural gas and Helium.
7. Property and Equipment
Property and equipment consisted of the following at December 31, 2007 and 2006:
December 31,
2007 2006
Computer equipment $ 859,147$ -
Airplane 4,633,347
Office furniture and equipment 576,982
Cd Construction in progress 2,102,325
Vehicles 2,221,101 -
Leasehold improvements 315,680 -
------------ -----------
10,708,582 -
Less accumulated depreciation and
amortization (112,119) -
------------ -----------
Total property and equipment $10,596,463 $ -
=========== ==========
F-16
Depreciation expense was approximately $112,119 and $0 for 2007 and 2006,
respectively. During the year ended December 31, 2007 the Company disposed of
fixed assets and realized a loss of approximately $3,807.
8. Asset Retirement Obligations
The following table indicates the changes to the Company's asset retirement
obligations account:
Amount
Balance at December 31, 2005 $ -
Liabilities incurred 148,964
Accretion expense 725
--------------
Balance at December 31, 2006 149,689
Revision in estimated liabilities (18,929)
Accretion expense 9,212
-------------
Balance December 31, 2007 139,972
Current asset retirement obligation 7,346
Long-term asset retirement obligation 132,626
-----------
Total asset retirement obligation $ 139,972
=========
9. Debt and Capital Leases
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 $72,000. 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.
In December 2007, Epic issued $20,250,000 of 10% Secured Debentures
("Debentures"). The Debentures are due on December 5, 2012, with interest
payable quarterly on January 1, April 1, July 1 and October 1 and are secured by
liens on all of the Company's assets. Beginning December 1, 2008, the Company is
required to make quarterly principal payments of $1,265,625. Any overdue accrued
and unpaid interest shall result in a late fee at an interest rate equal to the
lesser of 18% per annum or the maximum rate permitted by law. Prepayment is not
allowed without prior written consent of the holders. The purchasers of the
notes also received warrants which entitle the holders to purchase up to
15,954,545 shares of the Company's common stock at $1.65 per share. Under the
Black Scholes method using an expected life of five years, volatility of 72% and
a risk-free interest rate of 3.28%, the Company determined the warrants
associated with the debentures had a fair value of $13,085,380 as of the date of
the transaction. Such amount was recorded as additional paid in capital with a
corresponding amount recorded as a debt discount associated with the debentures.
The debt discount is being amortized to interest expense over the life of the
debentures, which mature on December 1, 2012. A total of $206,808 of debt
discount was amortized to interest expense in 2007.
F-17
Debt at December 31, 2007 and 2006 consists of the following:
December 31,
---------------------
2007 2006
---- -----
Note payable secured by properties acquired $ 3,710,441 $ 2,486,386
Notes payable for insurance coverage - 94,280
10% Debentures 20,250,000 -
----------- ------------
Total debt 23,960,441 2,580,666
Less current maturities 2,152,832 872,990
----------- ------------
Total long-term debt $ 21,807,609 $ 1,707,676
============ ===========
Principal maturities of debt obligations are as follows:
Year ending December 31, Amount
2008 $ 2,152,832
2009 6,032,440
2010 6,885,216
2011 5,082,671
2012 3,807,282
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, 2008 and November 27, 2018.
Amortization of the leased property is included in depreciation expense.
Maturities of capital lease obligations are as follows:
Year ending December 31, Amount
2008 $ 1,425,389
2009 1,188,635
2010 743,048
2011 598,825
2012 598,548
Thereafter 3,502,509
------------
Total minimum lease payments 8,056,954
Amount representing interest (2,001,734)
-----------
Present value of net minimum lease payments 6,055,220
Less current portion (1,055,303)
------------
Long-term capital lease obligation $ 4,999,917
============
F-18
The assets under capital lease that are included in property and equipment have
cost and accumulated amortization as follows:
December 31,
---------------------
2007 2006
---- -----
Vehicles - cost $ 2,221,101 $ -
Aircraft - cost 4,633,347 -
----------- -----------
Less accumulated amortization (84,553) -
----------- -----------
Total $ 6,769,895 $ -
=========== ===========
10. Stockholders' Equity
Common Stock
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. 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. The
shares issued were restricted shares in accordance with SEC section 144. In
addition to the shares of common stock issued in the private offering, Series A
warrants to purchase 212,500 shares of common stock exercisable at $2.00 per
share and Series B warrants to purchase 684,600 shares of common stock
exercisable at $2.50 per share were issued.
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.
In December 2006, 75,000 shares of common stock were issued to directors and key
employees 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 $57,094.
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 unproved
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.
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. 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.
F-19
During 2007, Epic issued 564,500 shares of unregistered restricted common stock
for net proceeds of $523,100 in private placements. There was $40,400 of
finder's fees related to these offerings. Epic sold 558,500 of these shares in
the form of 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 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 October 31, 2009. Both the
shares and the shares associated with the warrants are restricted for a one year
period.
In August 2007, a total of 3,241,366 shares of restricted common stock were
issued in conjunction with the Carnrite acquisition. Up to 1,673,034 additional
shares were awarded to key employees of Carnrite as retention shares. See Note
3.
In September and October 2007, a total of 1,786,240 shares of restricted common
stock were issued with the acquisition of Pearl. See Note 3.
A total of 43,500 shares were issued to consultants for services rendered with a
value of $127,100 during the year ended December 31, 2007.
On December 5, 2007 Epic sold 4,406,334 shares of its common stock to a group of
private investors for gross proceeds of $6,609,501, 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. Of the total proceeds, $634,500 had not been received as of December
31, 2007 and was included in accounts receivable - other. This amount was
collected in January 2008. 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.
Warrants
In conjunction with the issuance of common stock in December 2006, the Company
issued warrants to purchase 897,100 shares of common stock at between $2.00 and
$2.50 per share. Under the Black Scholes method using an expected life of two
years, volatility of 47% and a risk-free interest rate of 4.9%, the Company
determined the fair value of the warrants to be $335,619 as of the date of the
transaction. Such amount was recorded as additional paid in capital. In April
2007, the Company issued warrants to purchase 558,000 shares of common stock at
between $2.00 and $2.50 per share. Using the Black Scholes method using an
expected life of two years, volatility of 47% and a risk-free interest rate of
4.9%, the Company determined the fair value of the warrants to be $145,738 as of
the date of the transaction.
In conjunction with the issuance of $20,250,000 of debentures in December 2007,
the Company issued warrants to purchase 15,954,545 shares of common stock at
$1.65 per share (warrants to purchase an additional 1,116.816 shares were issued
to third parties assisting in the transaction). Under the Black Scholes method
using an expected life of five years, volatility of 72% and a risk-free interest
F-20
rate of 3.28%, the Company determined the warrants associated with the
debentures had a fair value of $13,085,380 as of the date of the transaction.
Such amount was recorded as additional paid in capital with a corresponding
amount recorded as a debt discount associated with the debentures. The debt
discount is being amortized to interest expense over the life of the debentures,
which mature on December 1, 2012. A total of $206,808 of debt discount was
amortized to interest expense in 2007.
In conjunction with the issuance of common stock to private equity investors in
December 2007, the Company issued warrants to acquire 5,429,335 shares of common
stock at $1.50 per share (warrants to purchase an additional 184,333 shares were
issued to third parties assisting in the transaction). Under the Black Scholes
method using an expected life of five years, volatility of 72% and a risk-free
interest rate of 3.28%, the Company determined the fair value of the warrants to
be $2,830,307 as of the date of the transaction.
A summary of warrant activity for 2007 and 2006 is as follows:
Number of
Warrants Weighted
Outstanding Average
and Exercisable Exercise Price
Issued in private placements in December 2006 897,100 $ 2.38
-----------
Outstanding, December 31, 2006 897,100 $ 2.38
Issued in private placements in April 2007 558,000 $ 2.25
Issued in private placements in December 2007 5,613,668 $ 1.50
Issued with debentures sold in December 2007 17,071,363 $ 1.65
Expirations (491,500) $ 2.00
----------
Outstanding, December 31, 2007 23,648,631 $ 1.65
==========
As of December 31, 2007, the range of warrant prices for shares under warrants,
the weighted average remaining contractual life and the aggregate intrinsic
value is as follows:
Remaining
Contractual Aggregate
Exercise Number of Life (in Intrinsic
Price Warrants months) Value
------- --------- ------------ ----------
Series B Warrants$ 2.50 963,600 21.5 $ 703,428
Series C Warrants$ 1.50 5,613,668 59.0 $ 9,711,646
Series D Warrants$ 1.65 17,071,363 59.0 $26,972,753
----------- -----------
23,648,631 $37,387,827
========== ===========
F-21
Stock Options
A summary of stock option activity for 2007 and 2006 is as follows:
Number of Weighted
Options Average
Outstanding Exercise Price
------------ -------------
Granted in October 2006 300,000 $ 0.50
Granted in October 2006 300,000 $ 3.00
------------
Outstanding, December 31, 2006 600,000 $ 1.75
Granted in July 2007 65,000 $ 3.17
Granted in December 2007 946,000 $ 3.30
------------
Outstanding, December 31, 2007 1,611,000 $ 2.72
==========
As of December 31, 2007, the exercise prices, remaining contractual life and
aggregate intrinsic value is as follows:
Remaining Outstanding Aggregate
Exercise Number of Life Intrinsic
Price Shares (in months) Value
---------------------------------------------------------
$ 0.50 300,000 10.0 $819,000
$ 3.00 300,000 10.0 $ 69,000
$ 3.17 65,000 54.0 $ 3,900
$ 3.30 946,000 60.0 $ -
--------- --------
1,611,000 $891,900
========= ========
As of December 31, 2007, there was approximately 2.0 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
4.9 years.
Restricted stock grants consist of the Company's common stock and generally vest
after two or three years, with the exception of grants under the Epic
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. In December 2007, the Company
granted 600,000 shares to two officers under a stock bonus plan. A total of
$19,529 was recorded as compensation expense related to these shares.
11. Income Taxes
The Company accounts for income taxes and the related accounts under the
liability method. Deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted rate expected to be in effect during the year in which
the basis differences reverse.
F-22
The (provision) for income taxes is comprised of the following:
December 31,
-------------------------
2007 2006
-------------------------
Current state $ (20,000) $ -
--------- ---------
Provision for income taxes $ (20,000) $ -
========= =========
Deferred income tax assets and liabilities consist of the following:
December 31,
-------------------------
2007 2006
-------------------------
Current deferred tax assets:
Allowance for doubtful accounts $ 216,240 $ -
Stock options 17,292
Non-current deferred tax assets:
Impairment of oil and gas properties 1,890,666 -
Other 94,357 -
Net operating loss carryforwards 929,170 225,700
Total deferred tax assets 3,147,725 225,700
Valuation allowance (3,147,725) (225,700)
------------- ------------
Net deferred tax assets $ - $ -
============= ============
A reconciliation of the actual income tax expense recorded to that based upon
expected federal tax rates is as follows:
December 31,
-------------------------
2007 2006
-------------------------
Expected federal tax benefit 34% 35%
Change in valuation allowance (34%) ( 35%)
------- ---------
( -)% ( -)%
========= =========
SFAS Statement No. 109 requires that the Company reduce its deferred tax assets
by a valuation allowance if, based on the weight of the available evidence, it
is not more likely than not that all or a portion of a deferred tax asset will
be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences are deductible. Additionally, the future utilization of
the Company's NOL carryforwards to offset future taxable income may be subject
to a substantial annual limitation, as a result of ownership changes that may
have occurred previously or that could occur in the future. The Company has not
yet determined whether such an ownership change has occurred. Based on the
judgment of management at this time, a valuation allowance has been recorded on
all deferred tax assets recorded on its books.
F-23
At December 31, 2007 and 2006, the Company had federal net operating loss
carryforwards of approximately $2.7 million and $0.9 million, respectively. The
federal tax net operating loss carryforwards will begin to expire in 2015.
In June 2006, the FASB issued FIN 48. The adoption of FIN 48 did not have a
material impact on Epic's operating results.
12. Commitments and Contingencies
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, 2007, management is not aware of any pending or
threatened litigation.
13. Operating Leases
The Company's new corporate offices are located in The Woodlands, Texas, in a
leased facility consisting of approximately 4,500 square feet requiring monthly
lease payments of $12,500 commencing on May 1, 2008.
The offices of Carnrite are located in Houston, Texas. The 1,480 square feet of
office space is occupied under a 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 are located at Lakewood, Colorado. The 30,552
square feet of office space is occupied under a lease requiring rental payments
of $42,168 per month. 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.
The future minimum rental payments under all of these leases for the next five
years are summarized below:
Year Ending December 31 Amount
2008 $ 941,280
2009 842,004
2010 731,156
2011 589,009
2012 246,303
------------
Total $3,349,752
F-24
14. Segment Reporting
With the acquisition of Carnrite and Pearl in 2007, 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
following information summarizes the operating results of these two segments for
the year ended December 31, 2007:
Engineering Oil and Gas
Segment Segment Consolidated
----------- ------------ ------------
Revenues $ 8,461,022 $ 9,674 $ 8,470,696
----------- ---------- -----------
Operating expenses:
General and administrative 1,343,396 2,533,491 3,876,887
Lease operating expenses - 383,280 383,280
Professional and subcontracted
services 1,127,293 - 1,127,293
Compensation and benefits 2,152,067 - 2,152,067
Reimbursed expenses. 2,103,522 - 2,103,522
Occupancy, communication and other 319,376 - 319,376
Depreciation, depletion and
amortization 117,021 - 117,021
Accretion expense - (9,717) (9,717)
Impairment of oil and gas properties - 2,166,766 2,166,766
Total operating expenses 7,162,675 5,073,820 12,236,4955
----------- ---------- -----------
Income (loss) from operations $ 1,298,347 $(5,064,146) $(3,765,799)
=========== =========== ===========
Total assets $68,670,788 $ 6,078,732 $74,749,520
=========== =========== ===========
15. Subsequent Event
On February 20, 2008, Epic acquired Epic Integrated Solutions, LLC ("Epic
Integrated"), 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
$1,400,000 will be paid to the three owners in periodic installments during 2008
and 2009 should they continue employment with the Company. 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 additional purchase price consideration. Summarized
below is the unaudited pro forma statement of operations for the years ended
December 31, 2007 and 2006 had the acquisitions of Carnrite, Pearl and Epic
Integrated taken place as of January 1, 2006:
F-25
Year Ended December 31,
2007 2006
---- ----
Revenues $ 62,198,522 $ 35,834,433
Operating expenses 62,700,303 35,044,445
Other income (expense) (5,918,607) (5,379,131)
Provision for income taxes (20,000) --
-------------- --------------
Net loss $ (6,440,388) $ (4,589,143)
============== =============
Net loss per share $ (0.12) $ (0.09)
=============== =============
On February 21, 2008, Epic entered into a settlement agreement with a
third party related to payment of fees in connection with the private placement
in December 2007. In exchange for a payment of $300,000 from Epic to this third
party, both Epic and the third party agreed to settle any and all claims and
disputes between the two parties.
F-26
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
Year Ending December 31 Amount
Proved oil and gas properties $ 10,507,590
Unproved oil and gas properties -
------------
Total capitalized costs. 10,507,590
Less: Impairment allowance (5,184,911)
Less: Accumulated depreciation (30,814)
------------
Total $ 5,291,865
============
Costs Incurred in Oil and Gas Producing Activities
December 31,
-----------------------
Year Ending December 31 2007 2006
----------------------- ----- -----
Acquisition of proved properties $ - $10,296,526
Acquisition of unproved properties - 60,000
Development costs - 2,100
Exploration costs - -
Asset retirement costs recognized under SFAS
No. 143 - 148,964
------ -----------
Total costs incurred $ - $10,507,590
====== ===========
Results of Operations from and Gas Producing Activities
December 31,
-----------------------
Year Ending December 31 2007 2006
----------------------- ----- -----
$ 9,674 $ 73,073
Production costs and taxes (383,280) (59,460)
Depreciation and amortization and ARO
accretion (9,717) (31,539)
--------- ----------
Results of operations before income taxes (383,323) (17,926)
Provision for income taxes. - -
--------- ---------
Results of oil and gas producing
activities $(383,323) $(17,926)
========= =========
The Company has presented the reserve estimates utilizing an oil price of
$82.53 per Bbl and a natural gas price of $4.32 per Mcf as of December 31, 2007
and 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).
The estimates of the Company's proved natural gas reserves and related
future net cash flows that are presented in the following tables are based upon
estimates made by independent petroleum engineering consultants.
F-27
The Company's reserve information was prepared by independent petroleum
engineering consultants as of December 31, 2007 and 2006. The Company cautions
that 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
-----------------------------------------
Year Ending December 31 BBL MCF BBL MCF
----------------------- -----------------------------------------
Reserves as of January 1, 2006 - -
Purchases 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 at December 31, 2006 3,717 4,970,318 3,717 2,778,131
Reserves as of January 1, 2006 - - - -
Purchases of reserves in place - - - -
Sale of reserves in place - - - -
Extensions and discoveries - - - -
Revisions of previous estimates 248 (8,861) 248 (8,861)
Production - - - -
------ --------- ----- ---------
Reserves at December 31, 2007 3,965 4,961,457 3,965 2,769,270
====== ========= ===== =========
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
SFAS No. 69, "Disclosures about Oil and Gas Producing Activities". 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, in
management's opinion, should be examined with caution. The basis for this table
is the reserve studies prepared by independent petroleum engineering
consultants, which contain 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
F-28
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 at December 31, 2007 and 2006
December 31,
----------------------
2007 2006
----- ----
Future cash inflows $ 21,760,766 $ 25,156,646
Future costs:
Production and development costs (9,953,970) (11,801,393)
Future income taxes (1,581,106) (4,231,950)
------------ ------------
Future net cash flows 10,225,690 9,123,303
10% annual discount for estimated timing
of cash flows (5,072,004) (3,960,490)
------------ ------------
Standardized measure of discounted future
net cash flows $ 5,153,686 $ 5,162,813
============ ============
The following reconciles the change in the standardized measure of
discounted future net cash flow during 2007:
Amount
--------------
Beginning of year. $ 5,162,813
Sales of oil and gas produced, net
of production cost 373,606
Net changes in sales price, net
of production costs (1,908,930)
Accretion of discount 600,074
Revisions of previous quantity estimates (20,749)
Changes in future income tax expense 2,191,697
Changes in production rates and other (1,244,825)
------------
End of year $ 5,153,686
============
F-29
THE CARNRITE GROUP, LLC
FINANCIAL STATEMENTS AS OF
JUNE 30, 2007
F-30
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-31
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-32
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-33
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-34
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 (1,207,883)
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-35
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-36
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-37
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 adoption of FIN 48 did
not have a material impact on Epic's operating results.
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-38
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-39
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-40
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-41
PEARL DEVELOPMENT COMPANY
Financial Statements as of
December 31, 2006 and 2005
F-42
PEARL DEVELOPMENT COMPANY
Table of Contents
Page
Independent Auditors' Report............................... F-36
Financial Statements
Balance Sheets....................................... F-37
Statements of Income................................. F-38
Statement of Changes in Stockholders' Equity......... F-39
Statements of Cash Flows............................. F-40
Notes to Financial Statements.............................. F-41
F-43
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-44
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-45
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-46
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-47
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-48
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 collectability 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-49
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 are 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-50
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-51
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-52
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-53
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-54
PEARL INVESTMENT COMPANY
Unaudited Condensed Consolidated Financial Statements
September 30, 2007
F-55
PEARL INVESTMENT COMPANY
Table of Contents
Page
Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)......................F-57
Condensed Consolidated Statements of Income (Unaudited)...............F-58
Condensed Consolidated Statements of Cash Flows (Unaudited)...........F-59
Notes to Unaudited Condensed Consolidated Financial Statements...........F-60
F-56
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 receivable - 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-57
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 6,311,950
----------- -----------
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-58
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-59
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-60
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-61
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-62
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-63
Note 3 - Subsequent Events
In December 2007, the Company was acquired by Epic Energy Resources, Inc. for
1,786,240 shares of its restricted common stock and $19,020,000 in cash. The
1,786,240 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-64
EPIC INTEGRATED SOLUTIONS L.L.C.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-66
Balance Sheets - December 31, 2007 and 2006 F-67
Income Statements - for the year ended December 31, 2007
and period from March 29, 2006 (inception) through
December 31, 2006 F-67
Statement of Members' Equity - for period from March 29,
2006 (inception) through December 31, 2007 F-69
Statements of Cash Flows - for the year ended December 31, 2007
and period from March 29, 2006 (inception) through
December 31, 2006 F-70
Notes to Financial Statements F-71
F-65
Report of Independent Registered Public Accounting Firm
To the Members of
Epic Integrated Solutions L.L.C.
Houston, Texas
We have audited the accompanying balance sheets of Epic Integrated Solutions
L.L.C. (the "Company") as of December 31, 2007 and 2006, and the related
statements of income and members' equity and cash flows for the year ended
December 31, 2007 and the period from March 29, 2006 (inception) through
December 31, 2006. 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Epic Integrated Solutions
L.L.C. as of December 31, 2007 and 2006, and the results of its operations and
cash flow for the year ended December 31, 2007 and the period from March 29,
2006 (inception) through December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas
March 20, 2008
F-66
EPIC INTEGRATED SOLUTIONS L.L.C.
Balance Sheets
December 31, December 31,
2007 2006
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 635,037 $ 283,005
Accounts receivable:
Billed, net of allowance of $0 232,798 125,911
---------------------------
TOTAL CURRENT ASSETS 867,835 408,916
Property and equipment, net 116,565 35,677
Other assets 5,086 -
---------------------------
TOTAL ASSETS $ 989,486 $ 444,593
===========================
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 72,739 $ 75,269
Accrued liabilities 4,593 168
---------------------------
TOTAL CURRENT LIABILITIES 77,332 75,437
---------------------------
TOTAL LIABILITIES 77,332 75,437
---------------------------
MEMBERS' EQUITY
TOTAL MEMBERS' EQUITY 912,154 369,156
---------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 989,486 $ 444,593
===========================
The accompanying notes are an integral part of these financial statements.
F-67
EPIC INTEGRATED SOLUTIONS L.L.C.
Income Statements
For the period from
March 29, 2006
For the year (inception) ended
December 31, through December 31,
2007 2006
--------------- ---------------------
REVENUES
Consulting fees $ 2,800,624 $ 1,045,497
Unbilled revenue 14,095 45,000
Reimbursed expenses
88,459 26,917
-------------- -----------
TOTAL REVENUES 2,903,178 1,117,414
OPERATING EXPENSES
General and administrative 242,208 47,944
Professional and subcontracted
services 1,321,000 414,025
Compensation and benefits 609,706 289,152
Depreciation and amortization 31,241 1,137
-------------- -----------
OPERATING EXPENSES 2,204,155 752,258
INCOME FROM OPERATIONS 699,023 365,156
OTHER INCOME (EXPENSE)
Interest expense (25) -
-------------- -----------
OTHER INCOME (EXPENSE) (25) -
NET INCOME $ 698,998 $ 365,156
============== ===========
The accompanying notes are an integral part of these financial statements.
F-68
EPIC INTEGRATED SOLUTIONS L.L.C.
Statement of Members' Equity
For the Period from March 29, 2006 (Inception) Through December 31, 2007
Balance March 29, 2006 (inception) -
Member Contributions 4,000
Net Income 365,156
------------
------------
Balance December 31, 2006 369,156
Member Distributions (156,000)
Net Income 698,998
------------
Balance December 31, 2007 912,154
============
The accompanying notes are an integral part of these financial statements.
F-69
EPIC INTEGRATED SOLUTIONS L.L.C.
Statements of Cash Flows
For the period from
March 29, 2006
For the year (inception) ended
December 31, through December 31,
2007 2006
--------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 698,998 $ 365,156
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 31,241 1,137
Accounts receivable (106,887) (125,911)
Accounts payable (2,529) 75,269
Accrued liabilities 4,425 168
----------- --------
Net cash provided by operating activities 625,248 315,819
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits (5,086) -
Acquisition of property and equipment (112,130) (36,814)
----------- --------
Net cash used in investing activities
(117,216) (36,814)
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Member contributions (distributions) (156,000) 4,000
----------- --------
Net cash provided by (used in) financing
activities (156,000) 4,000
----------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 352,032 283,005
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 283,005 -
----------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 635,037 $ 283,005
=========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 25 $ -
Income taxes paid - -
The accompanying notes are an integral part of these financial statements.
F-70
EPIC INTEGRATED SOLUTIONS L.L.C.
Notes to Financial Statements
December 31, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Epic Integrated Solutions 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.
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 December 31, 2007 and 2006, management determined that
no allowance for doubtful accounts was required based on management's assessment
of the collectability of these items. No accounts were written off during the
periods ended December 31, 2007 and 2006.
Property and Equipment
Property and equipment consists of office equipment, furniture and software and
are stated at cost. Depreciation is computed on a straight-line basis over
estimated useful lives ranging from three to five years.
F-71
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 periods ended December 31, 2007 and 2006.
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.
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.
Retirement Benefits Plan
On January 1, 2007, the Company adopted a qualified, defined contribution
retirement plan with a 401(k) salary deferral feature that covers substantially
all of its employees who meet certain requirements. Under the terms of the plan,
employees may contribute up to the total dollar limit that is set by law and the
Company will provide a matching contribution of 4% of 100% of gross earnings
contributed by the participants. The Company may, at its option, make additional
contributions. The terms of the plan provide for vesting in the Company's
matching contributions using the three-year cliff method.
F-72
In 2007, one eligible employee elected to contribute into the plan. The Company
expensed contributions for the retirement plan of $620 for the year ended
December 31, 2007.
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 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.
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.
F-73
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"). We are currently
assessing the impact of SFAS 159 on our financial statements.
NOTE 2 - LINES OF CREDIT
The Company has a $210,000 unsecured line of credit with a bank with an interest
rate set at the bank prime (7.75% per annum at loan date) plus 1% per annum,
payable monthly, that expires October 3, 2008. As of December 31, 2007, the
Company has not borrowed against this line of credit.
NOTE 3 - MEMBERS' EQUITY
On April 1, 2006, the Company issued members' equity to three individuals in
exchange for cash of $4,000.
On April 20, 2007, distributions of $156,000 were made to the three equity
members of the Company in accordance with the equity percentages in the LLC
agreement.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
On December 20, 2007, the Company entered into an agreement to lease office
facilities in The Woodlands, Texas under a twenty-four month operating lease
agreement. The agreement expires December 18, 2009, and provides for base
monthly rental payments of $5,086 through December 18, 2009 with pro rata
portion of any short months at the beginning and end of the lease term.
Future minimum lease payments for Epic Integrated Solutions operating lease
commitments are:
Fiscal Lease
Year Commitments
--------- ------------
2008 $ 61,035
2009 61,035
2010 -
2011 -
2012 -
Thereafter -
-------
Total $122,070
========
Exclusivity Agreement
On February 19, 2007, the Company entered into an agreement with Common Point,
Inc for exclusive rights to Common Point's OpSim Insight Training product
("OpSim"). The agreement expires February 18, 2009, and provides for the Company
to pay twenty two thousand five hundred ($22,500) dollars to Common Point every
6 months from the date of the agreement, provided however, that Epic will cease
F-74
all future payments if and when Epic provides seven hundred fifty thousand
($750,000) in revenue to Common Point through sales, service or otherwise. For
the year ended December 31, 2007 Epic paid $45,000 to Common Point under the
agreement. This amount was classified as an operating expense on the income
statement.
Future maximum payments for Epic Integrated Solutions exclusivity commitments
for OpSim are:
Fiscal Exclusivity
Year Commitments
------------ ------------
2008 $45,000
Thereafter -
-------
Total $45,000
=======
Concentrations of Risk
As of December 31, 2007, three of the Company's customers accounted for 41%, 30%
and 29% of total accounts receivable, respectively. For the period ended
December 31, 2007, the company's three largest customers accounted for 87%, 7%
and 6% of total revenues.
NOTE 5 - SUBSEQUENT EVENTS
In February 2008, the Company was acquired by Epic Energy Resources, Inc.
("Epic") for cash and shares of Epic restricted common stock. At closing, Epic
paid $600,000 and issued 1,000,000 shares of its common stock to the three
members of the Company. An additional $1,400,000 will be paid to the three
members in periodic installments during 2008 and 2009. The 1,000,000 shares were
issued to the Company's members, each of whom is also an officer of the Company.
The shares issued to each member 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.
F-75
Epic Energy Resources, Inc.
Unaudited Pro forma Condensed Combined Financial Information
December 31, 2007
The following unaudited pro forma condensed combined balance sheet and
explanatory note gives effect to the acquisition of Epic Integrated Solutions
("EIS") by Epic Energy Resources, Inc. ("Epic"). The unaudited pro forma
condensed combined statements of operations and explanatory notes give effect to
the acquisition of The Carnrite Group ("Carnrite"), Pearl Investment Company
("Pearl") and Epic Integrated Solutions ("EIS") by Epic.
The unaudited pro forma condensed combined balance sheet, unaudited pro forma
condensed combined statements of operations and explanatory notes are based on
the estimates and assumptions set forth in the explanatory notes. These pro
forma financial statements have been prepared utilizing the historical financial
statements of Carnrite, Pearl, EIS and Epic and should be read in conjunction
with the historical financial statements and notes thereto.
On August 13, 2007 Epic acquired Carnrite for 4,850,844 shares of its common
stock valued at $16,007,785. Of these 4,850,844 shares, 1,673,034 shares were
awarded to key employees of Carnrite as retention shares. These shares will be
required to be returned to Epic if the employees voluntarily terminate their
employment prior to March 28, 2009.
On December 5, 2007 Epic acquired Pearl for 1,786,240 shares of its common stock
and cash of $19,020,000.
On February 20, 2008 Epic acquired EIS in consideration for $600,000 and
1,000,000 shares of Epic's common stock. An additional $1,400,000 will be paid
to the three owners of EIS in periodic installments during 2008 and 2009. The
1,000,000 shares were issued to EIS's owners, each of whom is also an officer of
EIS. The shares issued to each officer will vest over a three-year period. All
or a portion of the shares issued to each officer will be forfeited and be
returned to Epic if the officer voluntarily terminates his or her employment
prior to February 20, 2011. Based upon management's interpretation of 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 additional purchase price.
The unaudited pro forma condensed combined balance sheet has been prepared as if
the acquisition of EIS was completed on December 31, 2007. The unaudited pro
forma condensed combined statement of operations for the year ended December 31,
2006 was prepared as if the acquisitions of Carnrite and Pearl had taken place
on January 1, 2006 and carried through to December 31, 2006. The unaudited pro
forma condensed combined statement of operations for the year ended December 31,
2007 was prepared as if the acquisitions of Carnrite, Pearl and EIS had taken
place on January 1, 2007 and carried through to December 31, 2007.
The unaudited condensed combined financial statements are presented for
informational purposes only, are based on certain assumptions that Epic believes
are reasonable and do not purport to represent Epic's financial condition or
results of operations had the business combination occurred on or as of the
dates noted above or to project the results for any future date or period. In
the opinion of Epic, all adjustments have been made that are necessary to
present fairly the unaudited condensed combined financial information.
The acquisition and related transactions have been treated as a purchase
business combination for accounting purposes, and Carnrite's, Pearl's and EIS's
assets acquired and liabilities assumed have been recorded at their fair value.
The allocations of the purchase price to Carnrite's, Pearl's and EIS's assets
and liabilities are only preliminary 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 will be tested for impairment on at least an annual
basis.
F-76
Epic Energy Resources, Inc.
Unaudited Pro forma Condensed Combined Balance Sheet
Pro Forma
Epic/Carnrite/
Epic EIS Pearl/EIS
Consolidated Consolidated Pro Forma as of
As of December 31, Adjustments December 31,
2007 2007 DR CR 2007
----------- ------------ ------- ------ --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (1) $ 3,483,179 $ 635,037 $ 600,000 $ 3,518,216
Restricted cash 3,400,003 3,400,003
Accounts receivable:
Billed, net of allowance of $0 11,334,690 232,798 11,567,488
Unbilled, at estimated net
realizable value 3,446,757 - 3,446,757
AR from affiliates 639,500 - 639,500
Prepaid expenses and other 309,081 - 309,081
----------- ----------- --------- --------- -----------
TOTAL CURRENT ASSETS 22,613,210 867,835 - 600,000 22,881,045
Oil and gas properties
(full-cost method), net
Proved 5,247,746 - 5,247,746
Unproved - - -
Other mineral reserves 783,474 - 783,474
Property and equipment, net 10,596,463 116,565 10,713,028
Other assets 209,213 5,086 214,299
Debt issuance costs, net 1,690,350 - 1,690,350
Goodwill (1) 33,609,064 - 2,137,846 35,746,910
----------- ----------- ---------- --------- -----------
TOTAL ASSETS $ 74,749,520 $ 989,486 $2,137,846 $ 600,000 $77,276,852
============ =========== ========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,066,368 $ 72,739 4,139,107
Bank overdrafts 3,441,949 - 3,441,949
Accrued liabilities (1) 2,949,270 4,593 1,400,000 4,353,863
Customer deposits 1,357,862 - 1,357,862
Current portion of long term debt 2,152,832 - 2,152,832
Current portion of capital leases 1,055,303 - 1,055,303
----------- ----------- ---------- --------- -----------
TOTAL CURRENT LIABILITIES 15,023,584 77,332 - 1,400,000 16,500,916
Asset retirement obligations 132,626 - 132,626
Long-term debt, net of current
portion and debt discount 8,929,037 - 8,929,037
Capital leases, net 4,999,917 - 4,999,917
----------- ----------- ---------- --------- -----------
TOTAL LIABILITIES 29,085,164 77,332 - 1,400,000 30,562,496
----------- ----------- ---------- --------- -----------
STOCKHOLDERS' EQUITY
Common stock (1) 40,698,806 - 1,050,000 41,748,806
Members' equity (1) - 912,154 912,154 -
Additional paid-in capital 13,416,792 - 13,416,792
Accumulated earnings (deficit) (8,451,242) - (8,451,242)
TOTAL STOCKHOLDERS EQUITY 45,664,356 912,154 912,154 1,050,000 46,714,356
----------- ----------- ---------- --------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 74,749,520 $ 989,486 $ 912,154 $2,450,000 $77,276,852
============ =========== ========== ========== ===========
F-77
Epic Energy Resources, Inc.
Unaudited Pro forma Condensed Combined Statement of Operations
Twelve Months Ended December 31, 2007
Carnrite
for the Pro Forma
Epic period from Pearl for EIS for Epic/Carnrite/
Consolidated inception the eleven the twelve Pearl/EIS
Year Ended through months ended months ended for the year
December 31, June 30, November 30, December 31, Pro Forma December 31,
2007 2007 2007 2007 Adjustments 2007
------------ ----------- ------------- ------------ ----------- ---------------
REVENUES
Consulting fees $ 8,461,022 $ 1,222,612 $ 49,602,036 $ 2,903,178 $ - $ 62,188,848
Oil and gas revenue 9,674 - - - - 9,674
Other - - - - -
------------ ----------- ------------ ------------ ---------- ------------
TOTAL REVENUES 8,470,696 1,222,612 49,602,036 2,903,178 - 62,198,522
------------ ----------- ------------ ------------ ---------- ------------
OPERATING EXPENSES
Compensation and benefits 3,857,958 21,858 4,206,938 609,706 - 8,328,962
Reimbursed expenses 383,280 - - - - 383,280
General and administrative 1,127,293 297,698 2,105,080 242,208 - 4,851,071
Lease operating expenses 2,152,067 157,894 17,760,028 - - 20,679,695
Professional and
subcontracted services 2,103,522 - 21,097,190 1,321,000 - 23,200,712
Occupancy, communication
and other 319,376 128,961 1,363,955 - - 1,812,292
Depreciation and
amortization 117,021 1,089 1,118,962 31,241 - 1,268,313
Accretion expense 9,212 - - - - 9,212
Impairment of oil and gas
properties 2,166,766 - - - - 2,166,766
------------ ----------- ------------ ------------ ---------- ------------
OPERATING EXPENSES 12,236,495 607,500 47,652,153 2,204,155 - 62,700,303
------------ ----------- ------------ ------------ ---------- ------------
INCOME (LOSS) FROM OPERATIONS (3,765,799) 615,112 1,949,883 699,023 - (501,781)
OTHER INCOME (EXPENSE)(2)(3)(4) (596,917) (2,106) 302,019 (25) (5,621,578) (5,918,607)
------------ ----------- ------------ ------------ ---------- ------------
NET INCOME (LOSS), BEFORE TAXES (4,362,716) 613,006 2,251,902 698,998 (5,621,578) (6,420,388)
TAXES 20,000 - - - - 20,000
------------ ----------- ------------ ------------ ---------- ------------
NET INCOME (LOSS) $(4,382,716) $ 613,006 $ 2,251,902 $ 698,998 $(5,621,578) $ (6,440,388)
============ =========== ============ ============ =========== ============
LOSS PER COMMON SHARE $ (0.12)
============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 54,441,601
============
F-78
Epic Energy Resources, Inc.
Unaudited Pro forma Condensed Combined Statement of Operations
Twelve Months Ended December 31, 2006
Pro Forma
Epic for Pearl for EIS for Epic/Pearl/EIS
the year the year the year for the
ended ended ended year ended
December 31, December 31, December 31, Pro Forma December 31,
2006 2006 2006 Adjustments 2006
REVENUES ------------ ------------ ------------ ----------- ---------------
Consulting fees $ 33,190 $34,610,756 $ 1,117,414 $ - $ 35,761,360
Oil and gas revenue 73,073 - - - 73,073
Other revenue - - - - -
--------- ----------- ----------- ---------- -------------
TOTAL REVENUES 106,263 34,610,756 1,117,414 - 35,834,433
--------- ----------- ----------- ---------- -------------
OPERATING EXPENSES
Compensation and benefits - 8,765,176 289,152 - 9,054,328
Reimbursed expenses - 16,260,146 - - 16,260,146
General and administrative 926,301 3,424,625 47,944 - 4,398,870
Lease operating expenses 59,460 - - - 59,460
Professional and
subcontracted services - 869,494 414,025 - 1,283,519
Occupancy, communication
and other - 503,060 - 503,060
Depreciation and
amortization 30,814 390,121 1,137 - 422,072
Accretion expense 725 - - - 725
Impairment of oil and gas
properties 3,062,265 - - - 3,062,265
--------- ----------- ----------- ---------- -------------
OPERATING EXPENSES 4,079,565 30,212,622 752,258 - 35,044,445
--------- ----------- ----------- ---------- -------------
INCOME (LOSS) FROM OPERATIONS (3,973,302) 4,398,134 365,156 - 789,988
OTHER INCOME (EXPENSE)(2)(3)(4) 3,088 117,451 - (5,499,670) (5,379,131)
---------- ----------- ----------- ---------- ------------
NET INCOME (LOSS), BEFORE
TAXES (3,970,214) 4,515,585 365,156 (5,499,670) (4,589,143)
TAXES - - - - -
---------- ----------- ----------- ---------- ------------
NET INCOME (LOSS) $(3,970,214) $4,515,585 $ 365,156 $(5,499,670) $(4,589,143)
=========== =========== ========== =========== ============
LOSS PER COMMON SHARE $ (0.09)
============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 48,852,566
============
F-79
EXPLANATORY NOTES
Pro forma adjustments
1. The adjustment to the balance sheet for the acquisition of EIS is to
recognize the consideration for the acquisition, being 1,000,000 shares of
Epic common stock valued at the closing price on February 20, 2008 of
$1.09 per share, $600,000 in cash and $1,400,000 to be paid in cash in
periodic installments during 2008 and 2009. The excess purchase price paid
over net book value is recorded as Goodwill. The equity of EIS is
eliminated as is standard in consolidation of acquired entities.
2. The adjustment to the income statement for the interest expense accrued on
the $20,250,000 notes issued in conjunction with the Pearl acquisition.
3. The adjustment to the income statement to amortize the debt discount on
the warrants issued in conjunction with the Pearl acquisition.
4. The adjustment to the income statement to amortize the debt issuance costs
incurred in conjunction with the Pearl acquisition.
F-80
EPIC ENERGY RESOURCES, INC.
INTERIM FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
F-81
EPIC ENERGY RESOURCES INC
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2008 2007
---------- ------------
(unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $ 4,671,592 $ 3,483,179
Restricted cash 2,400,000 3,400,003
Accounts receivable:
Billed, net of allowance of $636,000 8,700,949 11,334,690
Unbilled, at estimated net realizable
value 5,818,850 3,446,757
Accounts receivable - other 5,000 639,500
Prepaid expenses and other 212,589 309,081
----------- -----------
TOTAL CURRENT ASSETS 21,808,980 22,613,210
Oil and gas properties (full cost method),
net of accumulated impairments and
depletion of $5,259,845:
Proved 5,247,746 5,247,746
Unproved - -
Other mineral reserves 783,474 783,474
Property and equipment, net of accumulated
depreciation of $555,461 and $112,119,
respectively 10,843,569 10,596,463
Other assets 219,410 209,213
Debt issuance costs, net of accumulated
amortization of $146,914 and $28,650,
respectively 1,882,141 1,690,350
Goodwill and intangible assets, net of
accumulated amortization of $29,412
and $4,902, respectively 36,347,394 33,609,064
----------- -----------
TOTAL ASSETS $ 77,132,714 $74,749,520
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,969,972 $ 4,066,368
Bank overdrafts 626,848 3,441,949
Accrued liabilities 4,101,886 2,949,270
Customer deposits 3,083,781 1,357,862
Current portion of long term debt 5,025,944 3,208,135
----------- -----------
TOTAL CURRENT LIABILITIES 16,808,431 15,023,584
Asset retirement obligations 134,777 132,626
Long-term debt, net of debt discount of
$12,225,626 and $12,878,572, respectively 14,168,722 13,928,954
----------- -----------
TOTAL LIABILITIES 31,111,930 29,085,164
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par value: 100,000,000
authorized; 43,948,921 and 42,948,921
shares issued and outstanding at March 31,
2008 and December 31, 2007, respectively 42,007,303 40,698,806
Additional paid-in capital 13,726,847 13,416,792
Accumulated deficit (9,713,366) (8,451,242)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 46,020,784 45,664,356
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $77,132,714 $74,749,520
=========== ===========
See accompanying notes to consolidated financial statements.
F-82
EPIC ENERGY RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31,
2008 2007
------------------------------
REVENUES
Consulting fees $ 11,006,850 $ 74,842
Reimbursed expenses 6,467,018 -
Oil and gas revenue - 742
------------ ----------
TOTAL REVENUES 17,473,868 75,584
OPERATING EXPENSES
General and administrative 2,859,465 427,642
Lease operating expenses 60,206 64,303
Professional and subcontracted
services 1,706,905 -
Compensation and benefits 6,122,179 -
Reimbursed expenses 5,795,394 -
Occupancy, communication and other 346,608 -
Depreciation, depletion and
amortization 467,852 -
Accretion expense 2,151 5,369
------------ ----------
OPERATING EXPENSES 17,360,760 497,314
INCOME (LOSS) FROM OPERATIONS 113,108 (421,730)
OTHER INCOME (EXPENSE)
Interest and other income 24,740 2,103
Interest expense (1,399,972) (32,077)
------------ ----------
OTHER INCOME (EXPENSE) (1,375,232) (29,974)
------------ ----------
NET LOSS $ (1,262,124) $ (451,704)
============ ==========
LOSS PER COMMON SHARE - Basic and Diluted $ (.03) $ (.01)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
Basic and Diluted 43,333,536 52,659,835
See accompanying notes to consolidated financial statements.
F-83
EPIC ENERGY RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months
Ended March 31,
2008 2007
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (1,262,124) (451,704)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 467,852 -
Amortization of debt issuance costs 118,264 -
Accretion expense 2,151 5,369
Shares issued for compensation 258,497 113,676
Amortization of debt discount 652,946 -
Changes in operating assets and liabilities:
Accounts receivable 513,757 (66,336)
Prepaid expenses and other 272,297 32,462
Accounts payable (169,134) (70,670)
Accrued liabilities 2,873,942 86,813
---------- --------
Net cash provided by (used in) operating
activities 3,728,448 (350,390)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in restricted cash 1,000,003 -
Acquisition of property and equipment (572,795) -
Acquisition of EIS, net of cash received 35,037 -
Increase in other assets (191,810) -
----------- --------
Net cash provided by investing activities 270,435 -
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdrafts (2,815,101) -
Payments on debt (332,310) (42,184)
Proceeds from debt 336,941 -
Net proceeds from issuance of common stock - 454,000
----------- --------
Net cash provided by (used in) financing
activities (2,810,470) 411,816
----------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,188,413 61,426
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,483,179 590,172
----------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,671,592 $651,598
=========== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 628,762 $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Insurance policies acquired with debt $ - $ 25,992
Note payable for oil and gas property expenses $ 71,002 $ 57,462
Acquisition of EIS with stock $ 1,050,000 $ -
See accompanying notes to consolidated financial statements.
F-84
EPIC ENERGY RESOURCES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Epic Energy Resources, Inc ("Epic", the "Company", "we", "us", or "our") was
formed in April 2006 and completed a purchase of a public shell and began
trading under the ticker symbol EPCC.
Epic is engaged primarily in providing engineering, consulting, construction
management, operations, maintenance, and field and project management services
to the oil, gas and energy industry. Epic is also engaged in the acquisition,
exploration, development, production, and sales of oil, gas and natural gas
liquids. Following its formation, Epic was relatively inactive until April 2006
when its management changed and it became involved in oil and gas exploration
and development. Unless otherwise indicated, all references to Epic include the
operations of The Carnrite Group ("Carnrite"), Pearl Investment Company and its
subsidiaries ("Pearl") and Epic Integrated Solutions, LLC ("Epic Integrated),
subsequent to the dates that Epic acquired these companies.
During the first quarter, our Board of Directors updated their compensation plan
for the calendar year 2008. The plan defines compensation for non-employee
directors to include an annual cash retainer of $21,000 payable quarterly and a
grant of 25,000 stock options with a strike price equal to the closing price of
Epic common stock on January 17, 2008 and an expiration date of January 17,
2018. The Audit Committee chair will receive an additional cash payment of
$4,500. All other committee chairs will receive an additional $2,500.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in the United States
of America, or GAAP, for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and disclosures required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2008, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008. The balance sheet at December 31, 2007, has been derived from
the audited financial statements at that date but does not include all of the
information and disclosures required by GAAP for complete financial statements.
For further information, refer to the financial statements and notes thereto
included in Epic's Annual Report on Form 10-KSB for the year ended December 31,
2007. Certain 2007 financial statement amounts have been reclassified to conform
to the 2008 presentation.
F-85
EPIC ENERGY RESOURCES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation (cont'd)
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.
Receivables from Clients
Billed receivables from clients are presented at their billed amount less an
allowance for doubtful accounts. Unbilled receivables represent revenue earned
in the current period but not billed to the customer until future dates, usually
within one month. Epic 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 December 31, 2007 and March 31, 2008,
management determined that an allowance for doubtful accounts of $636,000 was
required based on management's assessment of the collectability of these items.
Property and Equipment
Property and equipment is stated at cost. 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 (see Note 6).
Revenue Recognition
Revenue includes fees primarily generated from engineering and consulting
services provided. The Company recognizes revenue from these 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 as a separate line in revenue in accordance with EITF 99-16; the cost
for these reimbursable expenses is included in operating expenses.
F-86
EPIC ENERGY RESOURCES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation (cont'd)
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.
2. Business Combinations
On August 13, 2007, Epic acquired Carnrite for 4,850,844 shares of its common
stock valued at $16,007,785. Of these 4,850,844 shares, 1,673,034 shares were
awarded to key employees of Carnrite as retention shares. These shares will be
required to be returned to the Company if the employees 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 additional purchase price consideration.
On December 5, 2007, the Company acquired Pearl for 1,786,240 shares of its
common stock and cash of $19,020,000. The consolidated statement of operations
includes the operations of Pearl during the quarter ended March 31, 2008.
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 three owners of Epic Integrated. An additional $1,400,000 will be paid
to the three owners in periodic installments during 2008 and 2009 should they
continue employment with the Company. 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 additional purchase price consideration. The consolidated statement
of operations includes the operations of Epic Integrated for the period from
February 20, 2008 through March 31, 2008.
F-87
EPIC ENERGY RESOURCES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
2. Business Combinations (cont'd)
The aggregate purchase price of Epic Integrated was $3,050,000 and consisted of
1,000,000 shares of common stock valued at $1.05 per share, the closing price on
the day of acquisition, a note in the amount of $1,400,000 to be paid in 18
months (see Note 7) and $600,000 of cash. The following table presents the
allocation of the acquisition cost to the assets acquired and liabilities
assumed, based on fair values:
Amount
Cash $ 635,037
Receivables from clients 232,798
Property and equipment 116,565
Other assets 5,086
Goodwill and intangible assets 2,137,846
-------------
Total assets acquired 3,127,332
Accounts payable 72,739
Accrued liabilities 4,593
-------------
Total liabilities assumed 77,332
-------------
Net assets acquired $ 3,050,000
=============
Summarized below is the unaudited pro forma statement of operations for the
Company for the quarters ended March 31, 2008 and 2007 had the acquisitions of
Carnrite, Pearl and Epic Integrated taken place as of January 1, 2007:
Three Months Ended March 31,
2008 2007
---- ----
Revenues $ 17,473,868 $ 11,323,568
Operating expenses 17,360,760 11,420,355
Other income (expense) (1,375,232) $ (1,932,514)
------------- -------------
Net loss $ (1,262,124) $ (2,029,301)
============= =============
Net loss per share $ (.03) $ (.04)
============= =============
The unaudited 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-88
EPIC ENERGY RESOURCES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
2. Business Combinations (cont'd)
The acquisitions and related transactions were treated as a purchase business
combination for accounting purposes, and Carnrite's, Pearl's and Epic
Integrated's assets acquired and liabilities assumed were recorded at their fair
value. The allocations of the purchase price to Carnrite's, Pearl's and Epic
Integrated's assets and liabilities are only preliminary allocations based on
estimates of fair value and will change when the actual fair values are
determined. Among the provisions of SFAS No. 141, criteria have been established
for determining whether intangible assets should be recognized separately from
goodwill. The Company has not made that determination as of March 31, 2008. The
Company has one year from the date of acquisition to make the determination.
3. Goodwill and Other Intangible Assets
Approximately $35.3 million of the purchase price related to the Carnrite, Pearl
and Epic Integrated acquisitions has been allocated to goodwill. Goodwill
represents the excess of the purchase price over the fair value of the net
tangible assets. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is not amortized but instead tested for impairment at least
annually (more frequently if certain indicators are present). In the event that
management determines that the value of the goodwill has become impaired, the
company will incur an accounting charge for the amount of the impairment during
the quarter in which the determination is made. Also see Note 2.
4. Other Mineral Reserves
Our proved oil and gas properties in Kansas contain Helium reserves estimated at
between 1% and 2% of the proved gas reserves of the property. Installation of
Nitrogen Rejection Units (NRU) to remove Nitrogen and harvest the Helium from
the field is in the final stages of manufacturing and installation. The third
party contracted to build, install and operate the NRU units estimates the
installation of the units to be completed in August of 2008. Capital costs to
build, install and operate the NRU units will be the responsibility of the third
party company in exchange for a percentage of the produced natural gas and
Helium.
5. 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. 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. We based the value of the offer on a 2005
engineering reserve report which showed a value of $10.5
F-89
EPIC ENERGY RESOURCES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
5. Oil and Gas Properties (cont'd)
million. As of March 31, 2008, the Company had recorded $5,184,911 of ceiling
test impairments to the Kansas properties compared with $3,062,265 at March 31,
2007. The Company recorded no depletion expense on these properties for the
quarters ended March 31, 2008 and 2007.
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. 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. The three initial test wells
were worked over and have been found to be uneconomical. Epic will decline
participation in future wells associated within the 6,000 acres in Kay County,
Oklahoma.
6. Property and Equipment
Property and equipment consisted of the following:
March 31, December 31,
2008 2007
Computer equipment $ 2,023,660 $ 859,147
Airplane 4,633,347 4,633,347
Office furniture and equipment 569,618 576,982
Construction in progress 234,477 2,102,325
Vehicles 2,517,682 2,221,101
Leasehold improvements 1,420,246 315,680
----------- -----------
11,399,030 10,708,582
Less accumulated depreciation and
amortization (555,461) (112,119)
----------- -----------
Total property and equipment $10,843,569 $10,596,463
=========== ===========
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 and bears annual interest of 10%.
The monthly principal and interest payment of this note is approximately
$72,000. Pursuant to the note agreement, if the cash flow from the property is
less than the monthly principal and interest payment, the deficit is added to
the principal amount of the note. If the cash flow from the property is greater
than the monthly principal and interest, the additional amount reduces the
principal of the note. Under these terms, during the three month period ended
March 31, 2008 and 2007, Epic incurred an additional $60,206 and $64,303,
respectively in lease operating expenses associated with the
F-90
EPIC ENERGY RESOURCES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
7. Long-Term Debt (cont'd)
Rush County property as the property had no production during the three month
period then ended. Expenses are paid by the lender and due to the lack of
revenue in the current quarter these expenses resulted in an increase in the
note.
In December 2007, Epic issued $20,250,000 of 10% Secured Debentures
("Debentures"). The Debentures are due on December 5, 2012, with interest
payable quarterly on January 1, April 1, July 1 and October 1 and are secured by
liens on all of the Company's assets. Beginning December 1, 2008, the Company is
required to make quarterly principal payments of $1,265,625. Any overdue accrued
and unpaid interest shall result in a late fee at an interest rate equal to the
lesser of 18% per annum or the maximum rate permitted by law. Prepayment is not
allowed without prior written consent of the holders. The purchasers of the
notes also received warrants which entitle the holders to purchase up to
15,954,545 shares of the Company's common stock at $1.65 per share. Under the
Black Scholes method using an expected life of five years, volatility of 72% and
a risk-free interest rate of 3.28%, the Company determined the warrants
associated with the debentures had a fair value of $13,085,380 as of the date of
the transaction. Such amount was recorded as additional paid in capital with a
corresponding amount recorded as a debt discount associated with the debentures.
The debt discount is being amortized to interest expense over the life of the
debentures, which mature on December 1, 2012. A total of $652,946 of debt
discount was amortized to interest expense for the three months ended March 31,
2008.
In connection with the Epic Integrated acquisition, we recorded a $1,400,000
note which will be paid to the three owners in periodic installments during 2008
and 2009. At March 31, 2007, $650,000 of this note is included in current
portion of long term debt on the balance sheet.
Debt consists of the following:
March 31, December 31,
2008 2007
Note payable secured by properties acquired $ 9,770,292 $ 9,765,661
Note payable in connection with Epic
Integrated acquisition 1,400,000 --
10% Debentures 20,250,000 20,250,000
----------- ------------
Total debt 31,420,292 30,015,661
Less current maturities 5,025,944 3,208,135
----------- ------------
Total long-term debt $26,394,348 $ 26,807,526
=========== ============
F-91
EPIC ENERGY RESOURCES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
8. Earnings Per Share
Earnings per share data for all periods presented have been computed pursuant to
SFAS No. 128, "Earnings Per Share" that requires a presentation of basic
earnings per share (basic EPS) and diluted earnings per share (diluted EPS).
Basic EPS excludes dilution and is determined by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
if securities and other contracts to issue common stock were exercised or
converted into common stock. As of March 31, 2008, we had outstanding options
covering an aggregate of 1,911,000 shares of common stock and outstanding
warrants covering an aggregate of 23,648,631 shares of common stock. Both the
outstanding options and warrants are excluded from our computation of diluted
EPS as they would be anti-dilutive. Excluded from the computation of diluted EPS
for the three months ended March 31, 2007 are options to purchase 600,000 shares
of common stock and outstanding warrants covering an aggregate of 897,100 shares
of common stock. Both the outstanding options and warrants are excluded from our
computation of diluted EPS as they would be anti-dilutive.
9. Stockholders' Equity
On January 17, 2008, 25,000 stock options were issued to each member of the
Board of Directors with a strike price equal to the closing price of Epic common
stock on January 17, 2008 and an expiration date of January 17, 2018.
On February 11, 2008, 200,000 stock options were issued to our Chief Financial
Officer with an exercise price of $1.02 per share and an expiration date of
February 11, 2018.
On February 20, 2008, the Company acquired Epic Integrated for $600,000 in cash
and issued 1,000,000 shares of its common stock. An additional $1,400,000 will
be paid to the three owners in periodic installments during 2008 and 2009. The
1,000,000 shares were shares issued to Epic Integrated's owners. 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 be returned to the Company
if the officer voluntarily terminates his or her employment prior to February
20, 2011.
F-92
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.
Kevin G. McMahon 6/10/08 17,000 Services as a director
and valued at $8,000.
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 1,075,000 Shares of Pearl
Investment Company.
Curtis L. Good 12/5/07 134,312 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.
Patrick Murray 12/5/07 75,000 Services rendered.
Mona Walker 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.
4
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.
Date
Name of Sale Shares Warrants Consideration
Chestnut Ridge Partners, LP 12-05-07 200,000 200,000 $300,000
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. (1) 12-05-07 500,000 500,000 $750,000
Fort Mason Master, LP (1) 12-05-07 469,550 469,550 $704,325
Fort Mason Partners, LP (1) 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
5
Date
Name of Sale Shares Warrants Consideration
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
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
(1) On April 30, 2008 Fort Mason Master, LP and Fort Mason Partners LP sold
their shares of common stock and warrants to Midsummer Investment, Ltd.
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
6
Principal
Name Amount of Note Warrants
Todd M. Binet $ 65,000 51,513
Cranshire Capital, L.P. $ 250,000 196,970
Midsummer Investment, Ltd. (1) $4,500,000 3,545,455
Fort Mason Master, L.P. (1) $2,112,975 1,664,769
Fort Mason Partners, L.P. (1) $ 137,025 107,960
Whitebox Convertible Arbitrage Partners, LP $5,500,000 4,333,334
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 XXXI, LLC $ 500,000 393,940
(1) On April 30, 2008 Fort Mason Master, LP and Fort Mason Partners LP sold
their notes and warrants to Midsummer Investment, Ltd.
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.
7
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 acquisition of the Incorporated by reference
Carnrite Group, LLC to Exhibit 10 to the
Company's report on
Form 8-K dated August 10,
2007.
10.2 Agreement relating to the acquisition of Pearl Incorporated by reference
Investment Company to Exhibit 10.1 to the
Company's report on Form
8-K dated December 5, 2007.
10.3 Securities Purchase Agreement (together with Incorporated by reference
schedule required by Instruction 2 to Item 601 to Exhibit 10.2 to the
of Regulation S-K) pertaining to the sale of Company's report on Form
common stock and warrants 8-K dated December 5, 2007.
10.4 Purchase Agreement (together with schedule Incorporated by reference
required by Instruction 2 to Item 601 of to Exhibit 10.3 to the
Regulation S-K) pertaining to the sale of Company's report on Form
the notes and warrants 8-K dated December 5, 2007.
10.5 Agreement relating to the acquisition of Epic
Integrated Solutions LLC *
--------------------------
10.6 Employment Agreement with R. Bret Rhinesmith *
--------------------------
10.7 Employment Agreement with Patrick W. Murray *
-------------------------
10.8 Gas Purchase Agreement with IACX Energy, LLC
10.9 Consulting Agreement with R. Bret Rhinesmith
21. Subsidiaries *
-------------------------
23.1 Consent of Attorneys *
-------------------------
23.2 Consent of Accountants -------------------------
* Previously filed.
8
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
(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
(5) That, for the purpose of determining liability under the Securities
Act of 1933 to any purchaser:
(i) If the registrant is relying on Rule 430B:
(A) Each prospectus filed by the registrant pursuant to Rule
424(b)(3) shall be deemed to be part of the registration statement as of the
date the filed prospectus was deemed part of and included in the registration
statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for
the purpose of providing the information required by section 10(a) of the
Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule
430B, for liability purposes of the issuer and any person that is at that date
an underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration statement
to which that prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such effective date, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such effective date; or
(ii) If the registrant is subject to Rule 430C, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
(6) That, for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities:
The undersigned registrant undertakes that in a primary officering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
10
(i) Any preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
11
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 30th day of June 2008.
EPIC ENERGY RESOURCES, INC.
Date: June 30, 2008 By: /s/ Rex P. Doyle
-------------------------------------
Rex P. Doyle, Principal
Executive Officer
Date: July 8, 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 June 30, 2008
- ------------------------- and Principal
Rex P. Doyle Executive Officer
Director
- -------------------------
W. Robert Eissler
/s/ Robert M. Ferguson Director June 30, 2008
- -------------------------
Dr. Robert M. Ferguson
/s/ Kevin G. McMahon Director June 30, 2008
- -------------------------
Kevin G. McMahon
EPIC ENERGY RESOURCES, INC.
FORM S-1
Amendment No. 3
EXHIBITS