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EX-32 - EPIC ENERGY RESOURCES, INC.v178989_ex32.htm
EX-31.1 - EPIC ENERGY RESOURCES, INC.v178989_ex31-1.htm
EX-31.2 - EPIC ENERGY RESOURCES, INC.v178989_ex31-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)
x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009
OR
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File No. 0-31357

EPIC ENERGY RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Colorado
 
94-3363969
(State of incorporation)
 
(IRS Employer Identification No.)

1450 Lake Robbins, Suite 160
   
The Woodlands, Texas
 
77380
(Address of Principal Executive Office)
 
Zip Code

Registrant's telephone number, including Area Code: (281)-419-3742 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:

Common Stock

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes  x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

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

x Yes  ¨ No
 
Indicate by check mark if disclosure  of  delinquent filers in pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

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

The aggregate market value of the voting stock held by non-affiliates* of the Company as of December 31, 2009 was approximately $4,250,327.

As of March 22, 2010 the Company had 45,413,734 shares of common stock outstanding.

* Without asserting that any of the issuer’s directors or executive officers, or the entities that own shares of common stock are affiliates, the shares of which they are beneficial owners have been deemed to be owned by affiliates solely for this calculation.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 
 

 
 
TABLE OF CONTENTS

   
Page
PART I
   
ITEM 1.
BUSINESS
3
ITEM 1A.
RISK FACTORS
8
ITEM 2.
PROPERTIES
12
ITEM 3.
LEGAL PROCEEDINGS
12
PART II
   
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
13
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
13
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
19
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
20
ITEM 9A (T).
CONTROLS AND PROCEDURES
20
ITEM 9B.
OTHER INFORMATION
21
PART III
   
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
22
ITEM 11.
EXECUTIVE COMPENSATION
24
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
27
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  AND DIRECTOR INDEPENDENCE
29
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
30
PART IV
   
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
32
SIGNATURES
 
34
 
 
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ITEM 1.     DESCRIPTION OF BUSINESS

Overview

Epic Energy Resources, Inc. (“Epic”) is an integrated energy services company based in Houston, Texas with field and sales offices in Denver, CO; Sheridan, WY; Sidney, MT; Durango, CO and Dubai, UAE.  Epic provides customized solutions that meet our clients’ needs along the global energy value chain – oil & gas upstream, midstream and downstream.  Our broad spectrum of services include: business and operations consulting; engineering, procurement, and construction management; production operations & maintenance; specialized training, operating manuals, data management and data integration.

Epic focuses its services on helping clients get the most value from their organizations and assets.  Our core competencies range from supporting complex decision-making to delivery of high integrity energy infrastructure to providing reliable, technical and operational support in the delivery of projects.  Our service promise is met by our comprehensive knowledge of how to get the best from the people, processes and tools that support the physical asset base or enterprise.  Our business is focused on four areas: business and operations consulting; upstream development and operations; midstream infrastructure through processing; and strategic investments in infrastructure and associated reserves.

Epic, through its business units (formally known and operated as subsidiaries), the Carnrite Group, LLC (the “Carnrite Group”), Pearl Investment Company (“Pearl”) and Epic Integrated Solutions, LLC (“EIS”) provides the following engineering and consulting services to the oil, gas and energy industry.

 
·
Engineering, Procurement, and Construction Management (EPCM)
 
·
Contract Operations and Maintenance (O&M) of Producing Assets, Infrastructure and Facilities
 
·
Project Management of Field Development Activities
 
o
From Permitting to Decommissioning
 
·
Business Management Consulting
 
o
Process Improvements
 
o
Portfolio Optimization
 
o
Financial Analysis
 
o
Organization Design
 
o
Others
 
·
Workforce Development and Training
 
·
Operations Documentation
 
·
Integration of Data Workflow and Operational Processes
 
·
Data Management
 
The Carnrite Group, Pearl and EIS were merged together in December 2009, and renamed Epic Integrated Services, Inc.

Epic also plans to evaluate producing and undeveloped oil and gas properties and participate in the optimization and/or development activities that, in the opinion of management, are favorable for the production of oil or gas. Epic may also acquire other producing oil and gas properties that have the potential to support additional oil and gas wells.  Although Epic previously has owned, drilled and produced oil and gas properties, as of March 20, 2010, it does not own any operating interests but does retain certain royalty interests.

Engineering and 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.
 
 
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In the late 1970's, a new model emerged with smaller companies being created that focused on only one aspect of the industry. Independent production companies were created to find, drill and produce oil and gas. Pipeline companies were formed to deliver product from producers to refineries and other end users. Refining companies were organized to refine oil and gas into usable fuels and products. And, finally, retail oriented companies were created to develop innovative ways to market gasoline (the birth of the gasoline station as a convenience store!).

Epic believes the next natural progression to be the separation of oil and gas producers into two groups: those which focus on exploration and drilling for oil and gas and those which focus on the efficient processing of oil and gas before it is transported.

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.

Business and Operations Consulting

Epic provides business and operations consulting services to help companies be competitive in the global energy market. Lasting, measurable performance improvements are achieved through understanding the drivers of business challenges and developing and implementing solutions that enable operational and organizational improvement.

Our seasoned industry consultants provide and help to implement customized solutions to complex strategic, operational and organizational issues affecting all segments of the energy industry.  We cultivate lasting relationships with clients who trust our judgment, respect our honesty and value our expertise.

Our consultants average 25 years of applied work experience, have strong industry experience, are knowledgeable in a wide range of traditional consulting tools and approaches and combine business experience with technical knowledge on projects all over the world.  Our consultants are recognized for using small, experienced consulting teams to craft unique solutions designed to meet specific client needs.

Engineering, Procurement, Construction Management; Production Operations and Maintenance

Epic is a diversified engineering, procurement and construction management, and field services company. Epic has expertise in the design, construction and operations of projects and assets across the energy value chain.  Engineering solutions are provided to clients beginning with conceptual design and culminate in delivery of equipment and facilities that support operational excellence.  The Epic team understands what it takes to achieve a return on investment and ensures that every solution delivers safe, efficient, and reliable results.

We provide value-added engineering, procurement, construction management and field services to the energy industry.  Our areas of focus include oil and gas development and production, refineries, petrochemical, alternative fuels and pipeline sectors.

Our engineers, designers and field staff consistently design and deliver fit for purpose business solutions.   We have the expertise to take projects from feasibility studies to startup and commissioning – and beyond.  Our capabilities support green-field development and brown-field expansions/upgrades.  Core competencies include permitting, safety and environmental compliance, geology, drilling, engineering, design, procurement, construction management, technical staff augmentation, operations, maintenance and measurement.

Specialized Training, Operating Manuals, Data Management and Data Integration

Epic focuses on improving the capability of the operations and maintenance organizations by providing industry leading competency assurance, customized training, operations documentation, data integration and associated consulting services.  Solutions bridge resource development and data integration gaps through the appropriate balance of technology, data management, documentation and training systems into one seamless package.

We provide seasoned technical people with hands-on practical knowledge supporting companies around the world in creating and maintaining a safe and productive workforce.  We have a long history in integrating smart documentation with innovative training to ensure client employees have the necessary capabilities to be successful in the future.  We provide high quality solutions using the latest technology.  We provide tools and programs for our clients around their operations and maintenance systems, training, and data management.

 
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We start by thoroughly understanding our client’s competency requirements and operations related data needs, whether for a new green-field facility or existing brown-field operation.  Our customized solutions bridge resource and information gaps by integrating data, documentation, workflow, and workforce development programs into one seamless package that remains useful for the lifecycle of a facility.  Our teams can provide something as simple as an operations or maintenance procedure or as complex as a full blown operations, maintenance and workforce development program that includes CMMS integration.

We leverage the latest in gaming technologies to provide a walk-through training tool specifically designed for the new “visual learners”.  These training models capitalize on the new generations’ gaming savvy to make training relevant and retainable.

Epic, through its business units, provides engineering, construction management, operations, maintenance, field and project management services, specialized training, operations documentation and data management services to the oil, gas and energy industry.

In February 2008, Epic acquired EIS, which was not affiliated with Epic prior to the transaction, for cash and shares of its restricted common stock. At closing, Epic paid $867,000 and issued 1,000,000 shares of its common stock to the three former owners of EIS. An additional $1,400,000 will be paid to the three former owners in periodic installments during 2010 and 2011. The 1,000,000 shares were issued to EIS's former owners, each of whom is also an officer of EIS. 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. EIS 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.

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 is 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 that some projects begin and end within a short-term period. Many contracts also do not provide 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 next 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 19, 2010, Epic's backlog for consulting services to be provided in the future was approximately $10.4   million. This compares to a combined backlog of approximately $43.5 million as of February 24, 2009.

During the year ended December 31, 2009, four customers accounted for 80% of Pearl’s total revenues, three customers accounted for 81% of Carnrite Groups’s total revenues, and three customers accounted for 82% of EIS’s total revenues.  During the year ended December 31, 2008, six customers accounted for 82% of Pearl’s total revenues, two customers accounted for 74% of Carnrite Group’s total revenues, and one customer accounted for 80% of EIS’s total revenues.
 
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Oil and Gas Exploration and Development

General

In the future, Epic plans to evaluate undeveloped oil and gas prospects and participate in drilling activities on prospects that in the opinion of management are favorable for the production of oil or gas. If, through this review, a geographical area indicates geological and economic potential, Epic intends to 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 that have the potential to support additional oil and gas wells.

Although Epic previously has owned, drilled and produced oil and gas properties, as of December 31, 2009, Epic does not own any operating interests although it does retain certain royalty interests.  Epic has executed an agreement with its partner in the Reichel field, in which the partner will assume all debt associated with the field along with operating expenses and any contingent liabilities in exchange for Epic’s interest in the field.  In addition, a third party has signed a farm out agreement in which Epic will receive a 3.75% net profits interest, up to a maximum of $500,000, in production from new wells drilled in the field.

Joint Venture

In July 2007, Epic formed a joint venture with UIV, known as Argos Asset Management, LLC (formerly known as Epic Exploration and Production LLC, “Argos”), to acquire energy assets and oil and gas properties. Epic manages the operations of the joint venture. UIV is responsible for providing equity capital required to fund the acquisition or development of the assets on a project-by-project basis.  A member of our Board of Directors owns 50% of the joint venture. Epic receives 20% of the net income from any asset or oil and gas property acquired by the joint venture until UIV receives 200% of the equity contributed by UIV to acquire the asset or property. Thereafter, the net income from the asset or property will be allocated equally between Epic and Argos. Argos is currently reviewing Farm-In opportunities in the Appalachian Basin in West Virginia.

Competition

Engineering and Consulting Services

The energy consulting industry is highly competitive. Competitors include large, multinational corporations such as SAIC, Accenture, Jacobs Engineering, 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:

 
·
price;
 
·
service quality (including the ability to deliver services quickly); and
 
·
technical proficiency.

Oil and Gas

Epic will be faced with strong competition from many other companies and individuals engaged in the oil and gas business, many of which are very large, with substantial capabilities, and are 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.

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:

 
·
the Comprehensive Environmental Response, Compensation and Liability Act;
 
·
the Resources Conservation and Recovery Act;
 
·
the Clean Air Act;
 
·
the Federal Water Pollution Control Act; and
 
 
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·
the Toxic Substances Control Act.

 
In addition to the federal laws and regulations, states often have numerous environmental, legal, and regulatory requirements which Epic must comply with.

Epic does not expect that costs pertaining to environmental compliance will have a material adverse effect on its operations.

Various state and federal agencies regulate the production and sale of oil and natural gas. All states in which Epic plans to operate impose restrictions on the drilling, production, transportation and sale of oil and natural gas.

The Federal Energy Regulatory Commission (the "FERC") regulates the interstate transportation and the sale in interstate commerce for resale of natural gas. The FERC's jurisdiction over interstate natural gas sales has been substantially modified by the Natural Gas Policy Act under which the FERC continued to regulate the maximum selling prices of certain categories of gas sold in "first sales" in interstate and intrastate commerce.

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 1980’s and the individual pipeline restructuring proceedings of the early to mid 1990’s, 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.

Corporate History

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 became involved in oil and gas exploration and development.

In March 2005, Epic affected 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. In March 2006, Epic also approved amendments to its Articles of Incorporation which changed the corporate name to Epic Capital Group, Inc., and changed Epic's authorized capitalization to 100,000,000 shares of common stock and 10,000,000 shares of preferred stock.

On December 1, 2006, Epic changed its corporate name to Epic Energy Resources, Inc.

In December 2009, Epic merged its three operating subsidiaries, Carnrite Group, Pearl and EIS, into a single operating subsidiary and renamed it “Epic Integrated Services, Inc.”  We did this to save administrative and other costs associated with maintaining three legal entities, enhance cross-selling between business units, and encourage pull-through opportunities.  Furthermore, we believe that marketing under the “Epic” brand name would be more efficient and effective going forward.

 
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Epic currently employs approximately 133 full-time employees working from six offices and serves clients in the U.S. Lower 48 states and the Middle East.

ITEM 1A.  RISK FACTORS

RISK FACTORS

Investing in our securities involves risk.  In evaluating the Company, careful consideration should be given to the following risk factors, in addition to the other information included or incorporated by reference in this Form 10-K. Each of these risk factors could materially and adversely affect our business, operating results or financial condition, as well as materially and adversely affect the value of an investment in our common or preferred stock.  In addition, the ‘‘Forward-Looking Statements’’ located in this Form 10-K, and the forward-looking statements included or incorporated by reference herein describe additional uncertainties associated with our business.
 
Energy Consulting Services
 
There is substantial doubt about our ability to continue as a going concern.
 
As a result of our current financial situation, management has concluded that there is substantial doubt about Epic’s ability to continue as a going concern.
 
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 years ended December 31, 2009 and 2008, Epic had a net loss of approximately $17,546,000 and $26,572,000, respectively. As of December 31, 2009, Epic had an accumulated deficit of approximately $31,778,000.
 
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 obtain and retain customers and to raise prices to its existing customers.
 
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The loss of one or more significant customers could result in a substantial decline in Epic’s consolidated revenues.
 
During the years ended December 31, 2009 and 2008, a small number of customers accounted for a significant amount of the total revenues of the Company. The loss of any of Epic’s significant customers could have a material adverse impact on the consolidated operating results of Epic.
 
Epic has significant working capital requirements.

Epic needs significant working capital in order to operate its business. Epic must maintain cash reserves to pay its employees and consultants prior to receiving payment from customers. These working capital requirements may increase in future periods. Epic was required to obtain a short term bridge loan in the amount of $500,000 in order to meet its working capital needs at the beginning of March 2010, and Epic is currently pursuing alternatives to meet its short and long term working capital needs.  If Epic is unsuccessful in obtaining additional capital, its cash balances cannot satisfy its working capital requirements and Epic will not have sufficient working capital to fund its ongoing operations.

If we are unsuccessful in obtaining amendments, deferrals and waivers to our outstanding 10% debentures and the purchase agreement related to such debentures, an event of default will continue to exist with respect to our Debentures.

Epic did not make its March 1, 2010 principal payment on its outstanding 10% debentures (the “Debentures”) when due and this resulted in an event of default under the Debentures, which will have a material adverse effect on our financial condition, results of operations and debt service capabilities and will raise substantial doubts about our ability to continue as a going concern unless such event of default is cured.  To cure this event of default, we are currently seeking from the holders of the Debentures a waiver of this event of default and a deferral of the $1,250,000 payment until the maturity date of the Debentures, December 5, 2012.

Under our Debentures, the Company is obligated to generate, on a consolidated basis, EBITDA (as defined in the Debentures) of at least $1,000,000 for each three-month period commencing on January 1, 2010 and ending on each March 31, June 30, September 30 and December 31 thereafter.   Any failure to comply with these EBITDA requirements, after notice and a five day cure period, would result in an event of default under the Debentures, which would have a material adverse effect on our financial condition, results of operations and debt service capabilities and would raise substantial doubt about our ability to continue as a going concern.  We do not currently anticipate that the Company will meet this target for the first quarter of 2010.  To remedy these uncertainties, we are currently seeking certain waivers to these EBITDA covenants from our Debenture holders so that we remain in compliance with these covenants.

We are currently seeking these amendments, deferrals and waivers in connection with our efforts to obtain additional working capital.  When these waivers, deferrals and amendments are in effect, we believe that a material covenant violation would no longer be probable.  However, there can be no assurance that we will obtain the amendments, deferrals and waivers with respect to all of our outstanding Debentures or that other matters might not arise in the future that could raise potential event of default or going concern issues. The failure to obtain the amendments, deferrals and waivers with respect to all of our outstanding Debentures would have a material adverse effect on our financial condition, results of operations and debt service capabilities.
 
 If our expansion efforts are not successful, our operations will be adversely affected.
 
Within the last two years, Epic acquired three energy consulting firms and, although it has no present plans to do so, it may continue to pursue new acquisitions in the future. Unsuccessful acquisitions may result in significant additional expenses that would not otherwise be incurred. In addition, 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. Epic also may not realize the revenues that it expected from these acquisitions.
 
Epic may suffer losses from its fixed-price contracts.
 
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. 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.
 
 
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Third parties we use may not provide goods and services in an adequate or timely manner.
 
Epic sometimes uses third-party subcontractors and equipment manufacturers to assist Epic with projects. To the extent Epic cannot engage subcontractors or acquire equipment or materials, its ability to complete a project in a timely manner 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 that differ from those in the United States and that could result in losses.
 
A 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:
 
 
·
political and economic instability;
 
·
civil unrest, acts of terrorism, force majeure, war, or other armed conflict;
 
·
currency fluctuations, devaluations, and conversion restrictions;
 
·
confiscatory taxation or other adverse tax policies;
 
·
government activities that limit or disrupt markets, restrict payments or result in the deprivation of contract rights; and
 
·
potential liability under the Foreign Corrupt Practices Act.
 
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 capital funding which it requires to engage in exploration and production activities.
 
 
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Oil and gas exploration and development is not an exact science and involves a high degree of risk.
 
The primary risk lies in the drilling of dry holes or drilling and completing wells which, though productive, do not produce gas and/or oil in sufficient amounts to return the amounts expended and produce a profit. Hazards, such as unusual or unexpected formation pressures, downhole fires, blowouts, loss of circulation of drilling fluids and other conditions are involved in drilling and completing oil and gas wells and, if such hazards are encountered, completion of any well may be substantially delayed or prevented. In addition, adverse weather conditions can hinder or delay operations, as can shortages of equipment and materials or unavailability of drilling, completion, and/or work-over rigs. Even though a well is completed and is found to be productive, water and/or other substances may be encountered in the well, which may impair or prevent production or marketing of oil or gas from the well.
 
Exploratory drilling involves substantially greater economic risks than development drilling because the percentage of wells completed as producing wells is usually less than in development drilling. Exploratory drilling itself can have 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 near 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, for a variety of reasons, the well 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 and gas.
 
The price for 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.

Our Common Stock

There is, at present, only a limited market for Epic’s common stock.

Epic's common stock is quoted on the OTC Bulletin Board and is thinly traded. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than other public trading markets, such as the NASDAQ stock market. Quotations for stocks included on the OTC Bulletin Board may not be listed in the financial sections of newspapers and prices for securities traded on the OTC Bulletin Board are often volatile.
 
We need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we will be unable to execute our business plan and current stockholders may experience significant dilution.
 
Epic had outstanding options and warrants which, as of December 31, 2009, allow the holders to acquire up to approximately 24,534,000 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 an effective registration statement with the Securities and Exchange Commission so that the shares of common stock sold in prior years financings, as well shares which may be issued in payment of the notes or upon the exercise of the warrants may be sold in the public market.  The sale of common stock issued or issuable upon the exercise of the warrants, or the perception that such sales could occur, may adversely affect the market price of Epic's common stock.
 
 
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The trading volatility and price of our common stock may be affected by many factors.

In addition to our operating results and business prospects, many other factors affect the volatility and price of our common stock. The most important of these, some of which are outside our control, are the following:

 
·
the current financial crisis, which has caused significant market volatility worldwide;
 
·
governmental action or inaction in light of key indicators of economic activity or events that can significantly influence U.S. financial markets, and media reports and commentary about economic or other matters, even when the matter in question does not directly relate to our business; and
 
·
trading activity in our common stock, which can be a reflection of changes in the prices for oil and gas, or market commentary or expectations about our business and overall industry.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  DESCRIPTION OF PROPERTIES

Office Leases

Our corporate headquarters address at 1450 Lake Robbins, Suite 160, The Woodlands, Texas 77380 is the business office address of the Epic CEO, CFO, General Counsel, Business Developers, Documentation and Training Employees, and the Consulting Group. The property is generic office space that meets the Company’s executive and administrative requirements. The lease payments are approximately $12,500 per month to occupy approximately 4,150 of office space. The lease expires in July 2015.

Epic’s Colorado office is located at 7110 Jefferson Avenue in Lakewood, Colorado. Epic occupies approximately 30,500 square feet of office space with lease payments of approximately $43,000 per month. The third floor lease on the space expires in July 2011. The second floor lease on the space expires in March 2012.

Epic’s Wyoming office is located at 1082 East Brundage in Sheridan, Wyoming. Epic occupies approximately 5,800 square feet of office space with lease payments of approximately $4,500 per month. The lease on the space expires in March 2012.

Epic has two additional branch offices located in Durango, Colorado and Sydney, Montana. The combined lease payments for these two branch offices are approximately $16,700.

Oil and Gas Properties

In February 2009, Epic sold its working interest in the Rush County, Kansas property and terminated its agreement related to the Oklahoma properties.  In addition, a third party has signed a farm-out agreement in which Epic will receive a 3.75% net profits interest, up to a maximum of $500,000, in production from new wells drilled in the Rush County field.

ITEM 3.  LEGAL PROCEEDINGS

A former employee has filed a case against Epic alleging that Epic terminated this former employee without good cause. Arbitration for this case is scheduled for August 2010. At December 31, 2009, Epic has accrued $400,000 related to this case which represents the estimated loss on this arbitration.

We currently and from time to time are subject to claims and suits arising in the ordinary course of business, including employment matters. If an adverse decision in these matters exceeds our insurance coverage, or if our coverage is deemed not to apply to these matters, or if the underlying insurance carrier was unable to fulfill its obligation under the insurance coverage provided, it could have a material adverse effect on our financial condition, results of operations or cash flows. The ultimate determination of such claims cannot be determined at this time.
 
 
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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
 
PART II

ITEM 5.  MARKET FOR REGISTRANTS COMMON EQUITY, STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of March 19, 2010, there were approximately 270 holders of record of Epic's common stock. Epic's common stock trades on the OTC Bulletin Board under the symbol "EPCC". Shown below are the ranges 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 represent actual transactions.

Quarter ended
 
High
   
Low
 
March 31, 2008
  $ 3.19     $ 0.15  
June 30, 2008
  $ 0.90     $ 0.59  
September 30, 2008
  $ 0.77     $ 0.30  
December 31, 2008
  $ 0.51     $ 0.05  
March 31, 2009
  $ 0.09     $ 0.08  
June 30, 2009
  $ 0.20     $ 0.20  
September 30, 2009
  $ 0.09     $ 0.08  
December 31, 2009
  $ 0.12     $ 0.11  

Holders of common stock are entitled to receive cash 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 cash dividend. Epic has never paid any cash dividends on its common stock and Epic does not have any current plans to pay any cash dividends on its common stock.

ITEM 6.  SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS/ PLAN OF OPERATIONS

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

Overview

Epic began operating in the oil and gas industry in April 2006.  In 2007, Epic acquired the Carnrite Group, LLC for 3,177,810 shares of its common stock and Pearl for 1,786,240 shares of its common stock and $19,020,000 in cash. On February 20, 2008, Epic acquired EIS, which was not affiliated with Epic prior to the transaction, for cash and 1,000,000 shares of its restricted common stock. At closing, Epic paid $867,000 and issued 1,000,000 shares of its common stock to the three owners of EIS. An additional $1,400,000 is to be paid to the three owners in periodic installments during 2010 and 2011.
 
 
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Epic, through its operating subsidiary, Epic Integrated Services, Inc., provides 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 plans to continue its growth in the Rocky Mountains, Texas, Louisiana, Oklahoma and Kansas, where it’s engineering and field services expertise is its strength, and also to explore opportunities in the Middle East where it currently is in the final stage of a large project.

Epic is focused on four areas: business and operations consulting; upstream development and operations; midstream infrastructure through processing; and strategic investments in infrastructure and associated reserves. Epic plans to evaluate producing and undeveloped oil and gas properties and participate in the optimization and/or development activities that, in the opinion of management, are favorable for the production of oil or gas. Epic may also acquire other producing oil and gas properties that have the potential to support additional oil and gas wells.  Although Epic previously has owned, drilled and produced oil and gas properties, presently the Company does not own any operating interests but does retain certain royalty interests.

As of March 19, 2010, Epic's backlog for future consulting services was approximately $10.4 million. This compares to a combined backlog of approximately $43.5 million as of February 24, 2009.

Results of Operations

Analysis of the Year Ended December 31, 2009 versus December 31, 2008

Revenues from continuing operations were $47.5 million for the year ended December 31, 2009 as compared to $72.2 million for the year ended December 31, 2008. The decrease of $24.7 million was attributable to a $12.5 million decrease in consulting fee revenue and $12.2 million decrease in reimbursed expense revenue. The decrease in revenue resulted from a decrease in demand for Epic’s services as a result of the downturn in the global economy.

Operating Expenses from continuing operations were $59.5 million for the year ended December 31, 2009 as compared to $87.5 million for the year ended December 31, 2008. The decrease of $28.0 million was primarily related to $15.2 million decrease in reimbursed expenses, $8.1 million decrease in general and administrative expenses, $6.8 million decrease in compensation and benefits, and $3.6 million decrease in professional and subcontracted service expenses.  The decreases were off-set by an increase in impairment charges of $10.1 million. These decreases were related to the decrease in revenues and due to aggressive cost cutting measures taken by management of the Company in 2009. The increase in the impairment charges was primarily related to the $9.9 million goodwill impairment loss recognized related to Carnrite Group for the year ended December 31, 2009.

Loss from Operations was $11.9 million for the year ended December 31, 2009 as compared to $15.3 million for the year ended December 31, 2008, a decrease of $3.4 million. The decrease was primarily due to aggressive cost cutting measures taken by the Company in 2009.

Other Expense, net was $7.9 million for the year ended December 31, 2009 as compared to $6.5 million for the year ended December 31, 2008. The increase in Other Expenses of $1.4 million was primarily due to the derivative loss recognized during the year ended December 31, 2009. The derivative loss was the result of a change in accounting principle related to warrants to purchase the Company’s common stock, of which the fair value is recorded as a derivative liability, with changes in the fair value reported in earnings.

Income (Loss) from Discontinued Operations relating to the oil and gas segment was $1.9 million for the year ended December 31, 2009 compared to a loss of $4.8 million for the year ended December 31, 2008. The increase of $6.7 million primarily resulted from an impairment loss of $4.0 million recognized during the year ended December 31, 2008 and a gain from the sale of the oil and gas properties of $2.1 million recognized during the year ended December 31, 2009.

Net Loss was $17.5 million or $(0.40) per share for the year ended December 31, 2009 as compared to $26.6 million or $(0.62) per share for the year ended December 31, 2008, a decrease of $9.1 million.
 
14

 
Liquidity and Capital Resources

We require capital to fund ongoing operations, including maintenance expenditures for our existing equipment, organic growth initiatives, investments and acquisitions.  Our primary sources of liquidity are cash flows generated from operations, available cash and cash equivalents, and accessing the capital markets through the issuance of debt or equity securities.  We intend to use these sources of liquidity to fund our working capital requirements, capital expenditures, strategic investments and acquisitions.

In December 2009, Epic sold its airplane for net proceeds of $2,796,169 and recorded a loss on the sale of the airplane of $648,206. As the proceeds from the sale left the Company deficient to cover the outstanding obligation on the airplane, the Company remains indebted related to the airplane. On December 23, 2009, Epic entered into a note payable for $1,108,330 (the “New note”) to cover the deficiency. The New note is a 4 year note and bears a 5.25% annual interest rate. The New note required a payment of $471,475 on December 23, 2009 and beginning January 23, 2010 principle and interest are payable monthly. At December 31, 2009, the New note had a balance of $636,855. In November 2009, to fund the December 23, 2009 payment required on the New note, the Company entered into a note payable for $500,000. The 2 year note which bears a 10% annual interest rate is due on December 21, 2012 with principle and interest payable monthly beginning January 1, 2010.

In March 2010, we were required to issue debt in order to meet our short term working capital needs.  On March 4, 2010, we entered into a bridge loan note (the “Note”) with Castex New Ventures, L.P. (“Castex”), in an aggregate amount of $500,000 to be used for general corporate purposes.  The Note bears interest at the rate of ten percent (10%) per annum.  All principal outstanding on the Note is payable at maturity, which is the earliest of (i) three (3) business days following written demand to Epic from Castex, (ii) June 1, 2010, and (iii) the date on which Castex’s obligation to make additional loans to Epic is terminated pursuant to a default, as that term is defined in the Note (such earliest date, the “Maturity Date”).  Interest is payable on the date of any repayment of any loans and on the Maturity Date.

The Note contains customary events of default.  Upon any default or at any time during the continuation thereof, Castex may, at its option and subject to applicable law, increase the interest rate on loans outstanding under the Note to a rate of 12 percent (12%) per annum.

Epic expects to refinance the Note in the near term.

We are currently pursuing alternatives to raise additional capital to fund our short and long term capital needs.  In the absence of additional capital raising activities, we do not believe that we will have sufficient short term working capital to fund our ongoing operations.

Debentures

Epic has 10% Secured Debentures (the “Debentures”) in the outstanding principal amount of $20,250,000. The Debentures were sold at their face value without discount. The Debentures bear interest annually at 10% per year, payable quarterly, with the first interest payment made on January 1, 2008. Beginning December 1, 2008, Epic was required to make quarterly payments of $1,265,625 toward the principal amount of the Debentures. The Debentures are due and payable on December 5, 2012 and are secured by liens on all of Epic's assets. The purchasers of the Debentures 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.

On December 1, 2008, the due date of the first quarterly principal redemption payment on the Debentures, the Company did not pay amounts due to the Debenture holders in an aggregate principal amount of $1,265,625.

On February 26, 2009, Epic entered into an Amendment Agreement (the “Amendment”) with all holders of its Debentures (the “Holders”), except for one holder of a $250,000 Debenture. As part of the Amendment, Rex P. Doyle, Chief Executive Officer and a director of the Company at the time, and John S. Ippolito, President of the Company, each agreed to transfer to each Holder, that Holder’s proportionate share of 3,209,877 shares, for an aggregate total of 6,419,754 shares (the “Shares”), of the Company’s common stock.  Messrs. Doyle and Ippolito were parties to the Amendment, but only with respect to these transfers of the Shares and not with respect to any other provisions.

Pursuant to the terms of the Amendment, the Holders agreed to waive any Events of Default (as defined in the Debenture and other documents executed in connection with the purchase of the Debentures) of which they had knowledge.  Also, to the extent that a Holder had requested acceleration of payment of its Debenture, the Holder rescinded such request and any resulting acceleration of its Debenture.  

 
15

 
 
The Amendment amends the purchase agreement pursuant to which the Debentures were purchased by adding three additional covenants, which require minimum EBITDA thresholds, limit the issuance of common stock, options and warrants to employees, consultants, officers, directors and advisors, and limit increases in executive compensation.

Pursuant to the Amendment, the Company paid the Quarterly Redemption Amount(s) (as defined in the Debentures) under the Holder’s Debenture scheduled to have been paid on December 1, 2008.

Subsequent to the Amendment Agreement, Epic executed a Debenture Repurchase Agreement dated March 13, 2009 with Cranshire Capital, L.P. (“Cranshire”) (the only Holder that did not execute the Amendment) to repurchase Cranshire’s outstanding Debenture having an original principal amount of $250,000.  Epic paid the repurchase price and Cranshire’s Debenture was cancelled.

As a result of the repurchase of the principal amount of $250,000, the Company’s quarterly principal payment was reduced to $1,250,000.

On December 1, 2009, the Company entered into a second Amendment Agreement (the “Second Amendment”) with two Holders. The Second Amendment deferred the Company’s December 1, 2009 Debenture payment to the two Holders until November 30, 2010 (the “Deferral Period”). During the Deferral Period, the annual interest rate for the two Holders is increased from 10% to 12%.

In December 2009, the Company entered into an auctioning agreement (the “Auctioning Agreement”) with The Receivables Exchange, LLC (“TRE”). Under the Auctioning Agreement, the Company sells its accounts receivables to TRE who in return advances cash of approximately 85% of the total amount of accounts receivable factored. TRE retains 15% of the outstanding factored accounts receivable as a reserve, which it holds until the customer pays the factored invoice to TRE. The Company pays fees for this service to TRE who performs all credit and collection functions, and assumes all risks associated with the collection of the receivables.

Epic's sources and (uses) of cash for the years ended December 31, 2009 and 2008 were (in thousands):

   
2009
   
2008
 
Cash provided by operations
  $ 793     $ 4,525  
Net sales (purchases) of property and equipment
    2,581       (731 )
Increase in restricted cash
    -       2,492  
Proceeds from sale of accounts receivables
    1,442       -  
Net repayments of debt
    (9,439 )     (1,268 )
Acquisition of EIS, net
    -       (232 )
Bank overdrafts
    -       (3,442 )
Other
    (9 )     (42 )

Other than the operating leases, as of December 31, 2009, Epic did not have any off-balance sheet arrangements.

Epic had a loan with a private lender which had a principal balance of $3,710,441 as of December 31, 2008 that was secured by Epic's gas wells in Rush County, Kansas. The loan accrued interest at 10% per year and was payable monthly.

In February 2009, the Company sold its Kansas property to a third party who assumed the note payable, including accrued but unpaid interest totaling $3,993,071 at the acquisition date and future profits interest in the properties of Statesman Resources, Inc. subject to the Company’s retention of an overriding royalty interest covering the Kansas property. During the year ended December 31, 2009, the Company recorded a $2,110,066 gain on the sale of the Kansas property. In addition, a third party has signed a farmout agreement in which Epic will receive 3.75% net profits interest, up to a maximum of $500,000 in production from new wells drilled in the Kansas property.

 
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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.

Other than the matters discussed above, 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.  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.

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 represent amounts due from customers for services performed. Epic extends various terms to its customers, with payment terms generally net 30 days, depending on the customer and country, and Epic does not typically 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.

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. Goodwill and other intangible assets with indefinite useful lives are not amortized, but instead, are tested at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their useful lives. The Company is not allowed 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. Management must 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.

 
17

 
 
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 discounted 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.

Stock-Based Compensation. Epic measures and recognizes 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. The Company must 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. 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, 2009 and 2008, Epic had recorded a full valuation allowance for its net deferred tax asset.

The Company uses 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. The guidance requires the Company to recognize tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities.  The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement.  A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.

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 29,340,817 and 32,797,018 at December 31, 2009 and 2008, respectively, were excluded because they were anti-dilutive due to the net loss attributable to common stockholders incurred in such periods.

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. On January 1, 2009, the Company adopted guidance which resulted in 22,685,031 outstanding warrants containing exercise price reset provisions, which were previously classified in equity, being reclassified as a derivative liability as of January 1, 2009 as these warrants were no longer deemed to be indexed to the Company’s common stock.
 
 
18

 

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. Epic amortizes the discount associated with these derivative components to interest expense at each reporting period.

Recent Accounting Pronouncements

In October 2009, the FASB issued new revenue recognition standards for arrangements with multiple deliverables, where certain of those deliverables are non-software related. The new standards permit entities to initially use management’s best estimate of selling price to value individual deliverables when those deliverables do not have Vendor Specific Objective Evidence of fair value or when third-party evidence is not available. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for annual periods ending after June 15, 2010 and early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on the Company’s consolidated financial position, results of operations and cash flows.

In June 2009, the FASB issued guidance establishing the ASC as the source of authoritative U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on changes in the Codification. All content in the Codification carries the same level of authority, and the U.S. GAAP hierarchy was modified to include only two levels of U.S. GAAP: authoritative and non-authoritative. The Codification is effective for the Company’s interim and annual periods beginning with the Company’s year ending December 31, 2009. Adoption of the Codification affected disclosures in the Consolidated Financial Statements by eliminating references to previously issued accounting literature, such as SFASs, EITFs and FSPs.

In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These new standards amend the evaluation criteria to identify the primary beneficiary of a variable interest entity and require ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of the new standards are effective for annual reporting periods beginning after November 15, 2009 and interim periods within those fiscal years. The adoption of the new standards will not have an impact on the Company’s consolidated financial position, results of operations and cash flows.

In May 2009, the FASB issued guidance establishing general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and shall be applied to subsequent events not addressed in other applicable generally accepted accounting principles. This guidance, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The adoption of this guidance had no impact on the Company’s consolidated financial position, results of operations and cash flows.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   

The information required by this item is included in Item 15, “Exhibits, Financial Statement Schedules.”
 
19

 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Effective September 10, 2009, Epic  dismissed Malone & Bailey, PC ("M&B") as the Company’s independent registered accounting firm and replaced them with M&K CPAS, PLLC ("M&K").  Effective September 10, 2009, the Company engaged M&K as its principal independent public accountant for the years ended December 31, 2009 and 2010. The decision to change accountants was recommended, approved and ratified by the Company's Board of Directors effective September 10, 2009.

M&B's report on the financial statements of the Company for the years ended December 31, 2008 and 2007, did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
  
During the years ended December 31, 2008 and 2007, and any subsequent interim periods through the date the relationship with M&B ceased, there were no disagreements between M&B and the Company on a matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of M&B would have caused M&B to make reference to the subject matter of the disagreement in connection with its report on the Company's financial statements.

There have been no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K during the years ended December 31, 2008 and 2007, and any subsequent interim periods through the date the relationship with M&B ceased.

The Company has authorized M&B to respond fully to any inquiries of any new auditors hired by the Company relating to their engagement as the Company's independent accountant. The Company has requested that M&B review the disclosure and M&B has been given an opportunity to furnish the Company with a letter addressed to the Commission containing any new information, clarification of the Company's expression of its views, or the respect in which it does not agree with the statements made by the Company herein. Such letter is filed as an exhibit to this Report.

The Company has not previously consulted with M&K regarding either (i) the application of accounting principles to a specific completed or contemplated transaction; (ii) the type of audit opinion that might be rendered on the Company's financial statements; or (iii) a reportable event (as provided in Item 304(a)(1)(v) of Regulation S-K) during the years ended December 31, 2008 and December 31, 2007, or any later interim period, including the interim period up to and including the date the relationship with M&B ceased (however, one of the current partners of M&K was employed by M&B during the Company's engagement of M&B and for our audit by M&B of the year ended December 31, 2006). M&K has reviewed the disclosure required by Item 304 (a) before it was filed with the Commission and has been provided an opportunity to furnish the Company with a letter addressed to the Commission containing any new information, clarification of the Company's expression of its views, or the respects in which it does not agree with the statements made by the Company in response to Item 304 (a). M&K did not furnish a letter to the Commission.

ITEM 9A(T).  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

John S. Ippolito, Epic’s President and Chief Executive Officer and Michael Kinney, Epic’s Chief Financial Officer, evaluated the effectiveness of Epic's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based upon their evaluation, Mr. Ippolito and Mr. Kinney have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009.
 
20

 
Management's Annual Report on Internal Control Over Financial Reporting
 
Epic's management is responsible for establishing and maintaining adequate internal control over  financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of Epic's principal executive officer and principal financial officer and implemented by its Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles, as well as safeguard assets from unauthorized use or disposition.

Epic's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Epic's financial statements in accordance with U.S. generally accepted accounting principles, and that its receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Epic's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of Epic's annual financial statements, management undertook an assessment of the effectiveness of Epic's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management's assessment included an evaluation of the design of Epic's internal control over financial reporting and testing the operational effectiveness of those controls as well as safeguarding assets.

Based on this assessment, we have concluded that our internal controls over financial reporting were effective as of December 31, 2009.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Commission that permit the Company to provide only management’s report in this annual report.

/s/  JOHN S. IPPOLITO
/s/  MICHAEL KINNEY
John S. Ippolito
Michael Kinney
President and Chief Executive Officer
Chief Financial Officer
   
March 30, 2010
March 30, 2010

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

Not applicable.
 
 
21

 

 
PART III

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON

Name
 
Age
 
Position
John Ippolito
 
50
 
President and Chief Executive Officer
Michael Kinney
 
52
 
Chief Financial Officer and Executive Vice President
John Hageman
 
55
 
Chief Legal Officer
W. Robert Eissler
 
59
 
Director
Dr. Robert Ferguson
 
66
 
Director
John Otto
 
61
 
Director
Alan Carnrite
 
51
 
Director
Tamer El-Rayess
 
39
 
Director
Martin Lipper
 
75
 
Director

On November 30, 2009, the Board of Directors of the Company appointed John S. Ippolito, the current President and Interim Chief Executive Officer of the Company, to serve as the Chief Executive Officer of the Company.
 
John S. Ippolito has been Chief Executive Officer of Epic since November 30, 2009.   Mr. Ippolito was Interim Chief Executive Officer of Epic from April 18, 2009 until November 30, 2009.  He has been President 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.

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 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.

John A. Hageman has been Epic’s General Counsel since September 2009. Between April 1997 and May 2009, Mr. Hageman served as Sr. Vice President, Chief Legal Officer and Secretary for Metals USA Holding Corp., the seventh largest metal service center in North America, located in Houston, Texas. From July 1987 to April 1997, Mr. Hageman served as Sr. Vice President, General Counsel and Secretary for Physician Corporation of America, a management care and HMO operator located in Miami, Florida.

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 a Texas State Representative for the 81st Legislature (2009-2010).

Dr. Robert M. Ferguson has been a director of Epic since December 2006. Since October 2005 Dr. Ferguson has been the President of the Leadership Institute for Vision and Ethics (Live) in Houston, Texas. Between January 2002 and September 2005 Dr. Ferguson was an independent consultant in the areas of organization and leadership. Since 2002 Dr. Ferguson has been an Adjunct Professor of Philosophy and Business Ethics at the Lone Star College, Montgomery in The Woodlands, Texas, and an Adjunct Professor in Business Ethics and Biblical Studies at Belhaven College in Houston, Texas. Since February 2008 Dr. Ferguson has been pastor at the Faith Fellowship Church in Spring, Texas. Between January 2002 and October 2005 he was pastor at Spring Cypress Presbyterian Church in Spring, Texas.

 
22

 
 
John Otto has been a director of Epic since November 2008.  Mr. Otto is a certified public accountant and financial services representative.  He is the founder and managing partner of John C. Otto, P.C., a CPA firm, and serves as a Director for Business Development of the tax firm Ryan and Co. Mr. Otto began his career in 1972 in public accounting with the national firm KPMG with primary responsibility as the senior auditor for Mitchell Energy and Development Corporation and was a key part of the accounting and finance team that assisted with the successful IPO of Mitchell Energy which grew into a multibillion dollar company before being acquired by Devon Energy.  Mr. Otto also serves as a Texas State Representative for the 81st Legislature (2009-2010).

Alan Carnrite has been a director of Epic since November 2008.  Since 2003, Mr. Carnrite has been a partner in a private oil and gas company and also leads an energy focused private equity fund.  With over 25 years of experience in diversified oil and gas, he has been an advisor to many companies in the E&P industry. From 2001 to 2003, Mr. Carnrite was a Managing Director and led the energy consulting practice at Jefferies Randall & Dewey.  Mr. Carnrite was a founder of the Carnrite Group LLC (a wholly-owned subsidiary of Epic) and the energy management consulting firm, Sterling Consulting Group, where he specialized in enhancing integrated companies' shareholder value through mergers and acquisitions, strategic leadership and value-added management assignments.  From 1981 to 2001, Mr. Carnrite worked for a large Canadian integrated energy company, where he played a key role in the firm’s privatization, the largest in Canadian history.

Martin Lipper has been a director of Epic since March 2009.  As of December 2007, Mr. Lipper is also a director of TX Holdings, Inc., a publicly reporting company.  Mr. Lipper is a Korean War Veteran, graduated from New York University in 1958 with a Bachelor of Science degree in Finance and Economics. Mr. Lipper began his career on Wall Street as a securities analyst specializing in bank stock analysis. He joined the Bank of New York and was a senior bank insurance and finance analyst. Later he became co-director of research at Eastman Dillon Union Securities and later Purcell Graham. In 1973, Mr. Lipper became Vice President and Treasurer of APF Electronics. From May 2002 to November 2006, Mr. Lipper was a Director of Research for Brill Securities, a regional NASD firm.  From November 2006 to March 2009, Mr. Lipper served as Senior Vice President and Research Director of Baron Group U.S.A.  Mr. Lipper is currently a Vice President of Research for the Wall Street Communications Group.

Tamer El-Rayess has been a director of Epic since March 2009.  Mr. El-Rayess received a BS in Physics from Rensselaer Polytechnic Institute in 1991 and earned a MBA in Finance with a minor in International Finance from New York University, Stern School of Business in 1995.  Since 2002 Mr. El-Rayess has served as Global Head, Commodities Finance & Capital Investments at UBS AG and has previously served as Vice President of Goldman Sachs Principal Finance Group from 1999 to 2002.  Mr. El-Rayess is also the founder of UIV, LLC, a private equity fund, focused on various industry sectors including energy since 2003.  UIV is an 80% residual interest member of Argos Asset Management, LLC (a joint venture partner with Epic).

Epic has a compensation committee. Dr. Ferguson, Mr. Eissler and Mr. Carnrite are the members of the compensation committee. Epic's audit committee is comprised of Dr. Ferguson and Mr. Otto. Mr. Otto serves as Epic's financial expert. There have been no material changes to the procedures by which security holders may recommend nominees to the registrant's board of directors
 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING  COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s directors, executive officers and beneficial owners of more than 10% of the Company’s common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company.  The Company believes that during the year ended December 31, 2009, each person who was an officer, director and beneficial owner of more than 10% of the Company’s common stock complied with all Section 16(a) filing requirements, except for the following:

·
Form 4s for John Ippolito and Rex Doyle filed on March 4, 2009.  The Form 4 for Mr. Doyle covered seven late reports and ten transactions that were not reported on a timely basis.  The Form 4 for Mr. Ippolito covered six late reports and seven transactions that were not reported on a timely basis.

 
23

 

·
Form 3s for Michael Kinney and Alan Carnrite filed on March 26, 2009; Form 4s for Robert Eissler, Dr. Robert Ferguson, and John Otto filed on March 26, 2009.  The Form 3 for Mr. Kinney and Mr. Carnrite amended one report and one transaction that was not reported on a timely basis.  The Form 4 for Mr. Eissler covered one late report and one transaction that was not reported on a timely basis.  The Form 4 for Dr. Ferguson covered one late report and one transaction that was not reported on a timely basis.  The Form 4 for Mr. Otto covered one late report and one transaction that was not reported on a timely basis.

CODE OF ETHICS

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer, controller, and persons performing similar functions.  A copy of the Company’s code of ethics is available on Epic’s website (www.1epic.com).

ITEM 11. EXECUTIVE COMPENSATION

The following table shows the compensation paid or accrued to Epic's Principal Executive Officer and the two other most highly compensated executive officers of Epic, or Epic's subsidiaries, during the years ended December 31, 2009 and 2008.

Name and principal
position
 
Fiscal
year
 
Salary
(1)
   
Bonus
(2)
   
Stock
awards
(3)
   
Option
awards
(4)
   
All other
annual
compensation
(5)
   
Total
 
John Ippolito,
Chief Executive Officer
 
2009
  $ 164,320       -       -       -       -     $ 164,320  
and President
 
2008
  $ 175,000       -     $ 615,000       -       -     $ 790,000  
                                                     
Michael Kinney,
Chief Financial Officer
 
2009
  $ 162,385       -       -       -       -     $ 162,385  
and Executive Vice President
 
2008
  $ 175,200       -       -     $ 132,384       -     $ 307,584  
                                                     
John Hageman,
Chief Legal Officer
 
2009
  $ 33,150       -       -       -       -     $ 33,150  
                                                     
Rex Doyle (6)
 
2009
  $ 335,150       -               -       -     $ 335,150  
   
2008
  $ 210,000       -     $ 615,000       -       -     $ 825,000  

(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 ASC 718 on the date of grant.
(4)
The fair value of options granted computed in accordance with ASC 718 on the date of grant.
(5)
All other compensation received that Epic could not properly report in any other column of the table.
(6)
Mr. Doyle also served as a director on the Company’s board of directors.  Mr. Doyle did not receive compensation for this director role.

On November 30, 2009, the Board of Directors of the Company increased the annual salaries of the Chief Executive Officer (John Ippolito) and the Chief Financial Officer (Mike Kinney) to $275,000 and $235,000, respectively.  Based on the Company’s current 30% salary deferral plan for certain management personnel, Mr. Ippolito will be paid at a current annual rate of $192,500 and Mr. Kinney will be paid at a current annual rate of $164,500.  These changes are effective as of September 6, 2009.  The annual deferrals will continue until such time as the Board of Directors elects, based on the financial and other circumstances of the Company, to discontinue the deferrals.  The amounts deferred also will be paid at the discretion of the Board based on the financial and other circumstances of the Company.

In February 2008, Michael Kinney replaced Rex Doyle as Epic's Principal Financial and Accounting Officer.  Mr. Kinney was awarded 200,000 stock options on his employment date pursuant to the Non-Qualified Stock Option Plan.

Epic does not have an employment agreement with any of its named executive officers.

 
24

 
 
In December 2008, the Compensation Committee of the Board of Directors approved the issuance of 1,500,000 restricted shares of the Company’s common stock, to each of Rex P. Doyle, former Chief Executive Officer and director of the Company, and John S. Ippolito, President of the Company.  300,000 of these restricted shares were issued to Messrs. Doyle and Ippolito, an additional 300,000 restricted shares were issued to Mr. Ippolito on December 13, 2009 and an additional 300,000 will be issued to Mr. Ippolito on each of December 13, 2010, 2011 and 2012; provided however these restricted shares are subject to certain restrictions and forfeitures.  These restricted shares will be subject to the following restrictions: (1) If Mr. Ippolito voluntarily terminates his employment with the Company before December 13, 2012, or is terminated for cause by the Company before December 13, 2012, he will forfeit 100% of the restricted shares and such shares will be returned to the Company’s treasury; (2) Mr. Ippolito may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of any of these restricted shares until December, 13, 2012; and (3) certain securities law restrictions on transferability.  In the event of a “change of control,” the restricted shares will be automatically issued and vested as of the date of the change of control.  A change in control is defined to include (1) any person or group becoming the beneficial owner, directly or indirectly, of 30% or more of the outstanding voting stock of the Company, (2) the stockholders of the Company approve a merger, combination or consolidation of the Company with any other entity resulting in the voting securities of the Company immediately prior to the transaction representing less that 51% of the merged, combined or consolidated securities, (3) any transaction (or combination of transactions) is consummated for the sale, disposition or liquidation of at least 50% of the Company's net assets, or (4) the election of one-third of the members of the Company's Board of Directors proposed by any party or group nominating directors in opposition to the directors nominated by the Company. Mr. Doyle’s severance agreement provided that he forfeit and cancel these 1,500,000 unvested, restricted shares of the Company’s common stock.

Stock Option and Bonus Plans

On February 13, 2009, the Compensation Committee of the Board of Directors of Epic approved a stock option plan (the “Plan”) pursuant to which the Company granted 100,000 options, for services rendered, to purchase common stock of the Company to each of Rex P. Doyle and John S. Ippolito.  These options vest at the time of issuance and have an exercise price of $0.50 per share, and expire on October 24, 2011.  The options granted are in the same amount and have the same exercise price as options that previously expired on October 24, 2008. In connection with Mr. Doyle’s resignation, the 100,000 options granted to Doyle were forfeited.

Epic has 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.

Long-Term Incentive Plans. Epic does not provide its officers or employees with stock appreciation rights, long-term incentive or similar plans.

Summary. The following is a summary, as of December 31, 2009, 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.
 
 
25

 
 
Name of Plan
 
Total shares
reserved
under plans
   
Shares
reserved for
outstanding
options
   
Shares
issued as
stock bonus
   
Remaining
options/
shares
under plans
 
Incentive Stock Option Plan
    2,000,000       -       N/A       2,000,000  
Non-Qualified Stock Option Plan
    3,200,000       1,309,500       N/A       1,890,500  
Stock Bonus Plan
    1,000,000       N/A       600,000       400,000  

The following table shows the options granted to and held by the persons named below at December 31, 2009:

   
Shares underlying unexercised options which are
   
Exercise
 
Expiration
 
Option
Vesting
Name
 
Exercisable
   
Unexercisable
   
Unvested
   
Price
 
Date
 
Date
John Ippolito
    100,000 (1)     -       -     $ 0.50  
10/24/11
 
10/24/08
John Ippolito
    50,000 (1)     -       -     $ 3.00  
01/01/10
 
10/24/08
John Ippolito
    182,000 (2)     -       -     $ 3.30  
12/31/12
 
12/12/09
                                       
Michael Kinney
    -       65,000 (2)     32,500     $ 3.17  
07/10/18
 
07/10/10
Michael Kinney
    -       200,000 (2)     66,667     $ 1.03  
02/11/19
 
02/11/11

(1) These options were issued pursuant to the Plan.
(2) These options were issued pursuant to the Non-Qualified Stock Option Plan.

As of March 15, 2010, none of the options granted by Epic had been exercised.

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, 2009

Name 
 
Paid in cash
   
Stock
awards
   
Option
awards
   
Other
   
Total
 
Robert Eissler
  $ 15,750       -       -       -     $ 15,750  
Dr. Robert Ferguson (1)
  $ 18,250       -       -       -     $ 18,250  
John Otto (2)
  $ 20,250       -       -       -     $ 20,250  
Alan Carnrite
  $ 15,750       -       -       -     $ 15,750  
Martin Lipper (3)
  $ 11,550       -       -       -     $ 11,550  
Tamer El-Rayess (4)
  $ 11,550       -       -       -     $ 11,550  

(1) Dr. Ferguson received $2,500 for serving on the compensation committee.
(2) Mr. Otto received $4,500 for serving on the audit committee.
(3) Mr. Lipper’s compensation was pro-rated for 2009.
(4) Mr. El-Rayess’ compensation was pro-rated for 2009.
 
As of December 31, 2009, the Board of Directors’ compensation plan defines annual compensation for non-employee directors as follows:

 
1.
Members of the Board are to be paid $31,000 per year in quarterly payments
 
2.
The Chairman and Committee Chair allowances will be
 
a.
Board Chair allowance will be $9,000
 
b.
Committee Chair allowances will be $6,000

 
26

 
 
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the number of and percentage of outstanding shares of common stock owned by Epic's officers, directors and those shareholders owning more than 5% of Epic's common stock as of March 22, 2010.

Name and address
 
Shares of
Common Stock
   
Percent
of Class
 
John Ippolito
1450 Lake Robbins, Suite 160
The Woodlands, TX  77380
    5,847,123 (1)     12.9 %
                 
Rex P. Doyle
30 Fernglen
The Woodlands, TX  77380
    4,832,023       10.6 %
                 
Michael Kinney
1450 Lake Robbins, Suite 160
The Woodlands, TX  77380
    632,000 (2)     1.4 %
                 
John Hageman
1450 Lake Robbins, Suite 160
The Woodlands, TX  77380
    325,000       *  
                 
W. Robert Eissler
1450 Lake Robbins, Suite 160
The Woodlands, TX  77380
    155,000 (3)     *  
                 
Dr. Robert Ferguson
1450 Lake Robbins, Suite 160
The Woodlands, TX  77380
    205,000 (4)     *  
                 
John Otto
702 N. Winfree
Dayton, TX  77535
    232,649 (5)     *  
                 
Al Carnrite
333 N. Sam Houston Pkwy E.,  Suite 1060
Houston, TX 77060
    2,093,467 (6)     4.6 %
                 
Martin Lipper
1450 Lake Robbins, Suite 160
The Woodlands, TX 77380
    100,000 (7)     *  
                 
Tamer El-Rayess
1450 Lake Robbins, Suite 160
The Woodlands, TX 77380
    100,000 (8)     *  
                 
All Executive Officers and Directors as a group (10 persons)
    14,522,262       32.0 %
                 
Midsummer Investment Ltd.
485 Madison Avenue, 23rd Floor
New York, NY 10022
    9,484,849 (9)     20.9 %
 
27

 
Whitebox Convertible Arbitrage Partners, LP
c/o Whitebox Advisors LLC
3033 Excelsior Blvd, Suite 300
Minneapolis, MN 55416-4675
    5,147,679 (10)     11.3 %
                 
Whitebox Special Opportunities
Partners Series B, LP
c/o Whitebox Advisors LLC
3033 Excelsior Blvd, Suite 300
Minneapolis, MN 55416-4675
    3,881,032 (11)     8.5 %
                 
Pandora Select Partners, LP
c/o Whitebox Advisors LLC
3033 Excelsior Blvd, Suite 300
Minneapolis, MN 55416-4675
    3,326,599 (12)     7.3 %
 
*     Less than 1%.

Beneficial ownership is determined in accordance with Rule 13d-3(a) of the Securities Exchange Act of 1934, as amended, and generally includes voting or investment power with respect to securities.  Except as subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by him.

The beneficial ownership percent in the table is calculated with respect to the number of outstanding shares (45,413,734) of the Company’s common stock outstanding as of March 22, 2010.  Each stockholder’s ownership is calculated as the number of shares of the common stock owned plus the number of shares of common stock into which any preferred stock, warrants, options or other convertible securities owned by that stockholder can be converted within 60 days.

The term “named executive officer” refers to our principal executive officer, our two most highly compensated executive officers other than the principal executive officer who were serving as executive officers at the end of 2009 and one additional individual for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the Company at the end of 2009.

(1)
Includes 100,000 shares issuable upon exercise of options exercisable within 60 days.  Includes 300,000 of these restricted shares that were issued to Mr. Doyle and an additional 300,000 restricted shares that will be issued to Mr. Ippolito on each of December 13, 2010, 2011 and 2012.
(2)
Includes 155,001 shares issuable upon exercise of options exercisable within 60 days
(3)
Includes 100,000 shares issuable upon exercise of options exercisable within 60 days.
(4)
Includes 150,000 shares issuable upon exercise of options exercisable within 60 days.
(5)
Includes 150,000 shares issuable upon exercise of options exercisable within 60 days.
(6)
Includes 150,000 shares issuable upon exercise of options exercisable within 60 days.
(7)
Includes 100,000 shares issuable upon exercise of options exercisable within 60 days.
(8)
Includes 100,000 shares issuable upon exercise of options exercisable within 60 days.
(9)
Includes 5,318,182 shares issuable upon exercise of warrants at $1.65 a share. Includes 1,000,000 shares issuable upon exercise of warrants at $1.50 a share.
(10)
Includes 4,333,333 shares issuable upon exercise of warrants at $1.65 a share.
(11)
Includes 2,275,575 shares issuable upon exercise of warrants at $1.65 a share.
(12)
Includes 2,363,636 shares issuable upon exercise of warrants at $1.65 a share.

Equity Compensation Plans.  The following table provides information as of December 31, 2009 with respect to shares of common stock that may be issued under our existing equity compensation plans.  We have two equity compensation plans, one approved by the Board of Directors in 2006, and another approved by the Board of Directors in 2008.  Epic’s stock option plans were not approved by its shareholders.
 
 
28

 

Equity Compensation Plan Information
 
Plan category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
   
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
 
Incentive Stock Option Plan
                2,000,000  
Non-Qualified Stock Option Plan
    1,309,500     $ 2.35       1,890,500  

For a description of the Incentive Stock Option Plan and Non-Qualified Stock Option Plan, see Item 11.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

On March 4, 2010, Epic entered into a Note as borrower, with Castex New Ventures, L.P. (“Castex”), as lender, in an aggregate amount of $500,000 at any time outstanding to be used for general corporate purposes.  The Note bears interest at the rate of ten percent (10%) per annum.  All principal outstanding on the Note is payable at maturity, which is the earliest of (i) three (3) business days following written demand to Epic from Castex, (ii) June 1, 2010, and (iii) the date on which Castex’s obligation to make additional loans to Epic is terminated pursuant to a default, as that term is defined in the Note (such earliest date, the “Maturity Date”).  Interest is payable on the date of any repayment of any loans and on the Maturity Date.

The Note contains customary events of default.  Upon any default or at any time during the continuation thereof, Castex may, at its option and subject to applicable law, increase the interest rate on loans outstanding under the Note to a rate of 12 percent (12%) per annum.  Epic expects to refinance the Note in the near term.

Al Carnrite, the Company’s Chairman, is an officer of the General Partner of Castex.  Mr. Carnrite abstained from voting on the approval of this loan by the Company.    All of the members of the Board of Directors other than Mr. Carnrite voted in favor of the transaction following a determination that the terms and conditions of this Note were commercially reasonable and were arrived at based upon arms’ length negotiations.

On February 26, 2009, Epic entered into an Amendment Agreement (the “Amendment”) with all holders of its Debentures (the “Holders”), except for one Holder of a $250,000 Debenture, to amend the Purchase Agreement and the Debentures. As part of the Amendment, Rex P. Doyle, formerly the Chief Executive Officer and a director of the Company, and John S. Ippolito, the Chief Executive Officer and President of the Company, each agreed to transfer to each Holder, that Holder’s proportionate share of 3,209,877 shares, for an aggregate total of 6,419,754 shares (the “Shares”), of the Company’s common stock.  Messrs. Doyle and Ippolito also were parties to the Amendment, but only with respect to these transfers of the Shares and not with respect to any other provisions.

In July 2007, Epic formed a joint venture, Argos Asset Management, LLC (formerly known as Epic Exploration and Production, LLC (“Argos”). Argos intends to acquire energy assets and oil and gas properties. Epic manages the operations of the joint venture. Argos is responsible for providing capital required to acquire the assets on a project-by-project basis.  Epic receives 20% of the net income from any asset or oil and gas property acquired by the joint venture until Argos receives 100% of the equity contributed by Argos to acquire the asset or property. Thereafter, the net income from the asset or property will be allocated equally between Epic and Argos. Tamer El-Rayess, a director for the Company as of March 2009, is a founder of Argos Asset Management, LLC.  As of March 20, 2010, the joint venture was not considering any immediate acquisitions of working interests.
 
 
29

 

The Company has not implemented a formal written policy concerning the review of related party transactions, but it compiles information about transactions between the Company and its directors and officers, their immediate family members, and their affiliated entities, including the nature of each transaction and the amount involved. The Board of Directors annually reviews and evaluates this information, with respect to directors, as part of its assessment of each director’s independence.

Director Independence

Our common stock trades on the OTC Bulletin Board.  As such, we are not currently subject to corporate governance standards of listed companies, which require, among other things, that a majority of the board of directors be independent.  We have chosen to define an “independent” director in accordance with Section 121(A) of the listing standards of the American Stock Exchange.  Under this definition, we have determined that each of our directors currently qualifies as an independent director.  We do not list the “independent” definition we use on our Internet website.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Malone & Bailey, P.C. ("M&B") audited Epic's financial statements for the years ended December 31, 2008 and 2007.

Effective September 10, 2009, EPIC dismissed M&B as the Company’s independent registered accounting firm and replaced them with M&K CPAS, PLLC ("M&K").  Effective September 10, 2009, the Company engaged M&K as its principal independent public accountant for the years ended December 31, 2009 and 2010. The following table shows the aggregate fees billed to Epic by M&B and M&K for the years ended December 31, 2009 and 2008.

   
Malone & Bailey
   
M&K
 
   
2009
   
2008
   
%
   
2009
 
Audit fees
  $ 251,127     $ 177,648       78 %   $ 77,500  
Audit related fees
    -       29,290       13 %     -  
Tax fees
    -       19,500       9 %     -  
Other fees
    -       -       -       -  
Total
  $ 251,127     $ 226,438             $ 77,500  

Audit fees represent amounts billed for professional services rendered for the audit of Epic's annual financial statements and the reviews of the financial statements included in Epic's 10-Q reports for the fiscal year.
 
Under the Sarbanes-Oxley Act of 2002, Epic’s audit committee is responsible for the appointment, compensation and oversight of the work of the independent auditor.  As part of this responsibility, the audit committee is required to pre-approve audit and non-audit services provided by the independent auditor in order to ensure the services do not impair the auditor's independence.  The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee's responsibility for administering the engagement of the independent auditor, including pre-approval of fees.  Accordingly, Epic’s audit committee has adopted the following pre-approval policy and procedures for audit, audit-related, and tax services. 
 
The audit committee has adopted an approach whereby all services obtained from the independent auditor will be pre-approved. Under this approach, an annual program of work will be approved for each of the following categories of services: audit, audit-related, and tax.  Engagement-by-engagement pre-approval will not be required, except for exceptional or ad hoc incremental engagements with fees resulting in the fee category exceeding the aggregate pre-approved program of work for that category.  In general, a work program for each category of services can be supplemented with additional pre-approved amounts after appropriate review of the additional services with the audit committee.  The audit committee may consider specific engagements in the All Other Services category on an engagement-by-engagement basis.
 
For all services obtained from the independent auditor, the audit committee will consider whether such services are consistent with the SEC's rules on auditor independence.  The audit committee will consider the level of audit and audit-related fees in relation to all other fees obtained from the independent auditor, and will review such level each year.

 
30

 

Pre-Approval Process and Delegation of Authority
 
The primary review and pre-approval of services to be obtained from the independent auditor and related fees will be scheduled for the audit committee meeting at the end of the financial year.  If fees might otherwise exceed pre-approved amounts for any category of permissible services, then incremental amounts can be reviewed and pre-approved at subsequent audit committee meetings prior to commitment.  If needed, time will be set aside in any scheduled audit committee meeting for review and pre-approval of additional services.  No additional authority is delegated for pre-approval of services obtained from the independent auditor.
 
The independent auditor and Epic management will jointly manage a process for collecting and reporting all fees billed by the independent auditor to Epic for each financial year.
 
Audit Services
 
Engagement term, scope of service and fees for the annual examination of Epic’s financial statements will be pre-approved by the audit committee.  These audit services include the integrated audit of Epic’s consolidated financial statements (including required quarterly reviews) and the effectiveness of internal control over financial reporting, audits of affiliate and subsidiary statutory financial statements, and other procedures required to be performed by the independent auditor to be able to render an opinion on Epic’s consolidated financial statements.
 
The audit committee will be responsible for direction and oversight of the engagement of the independent auditor.  At its discretion, the audit committee will obtain input from Epic management on the terms of the engagement, the effectiveness with which the engagement is carried out, and the amount of audit fees.  The independent auditor is responsible for the cost-effective management of the engagement, and for ensuring that audit services are not provided prior to review and pre-approval by the audit committee.
 
Audit-related Services

Audit-related services include services that are reasonably related to the performance of the audit of Epic’s financial statements. These services include asset dispositions, benefit plan and joint venture audits, attestation procedures related to cost certifications and government compliance, consultations on accounting issues, and due diligence procedures.  Each year the audit committee will conduct a broad review of the proposed services to ensure the independence of the independent auditor is not impaired.
 
General pre-approval will occur at the end of each year coincident with pre-approval of audit services.  Applicable operating and staff functions will be requested to assign a process-owner to monitor the engagement of the independent auditor for audit-related services. 
 
Tax Services
 
The audit committee concurs that the independent auditor may provide certain tax services without impairing its independence.  These services include preparing local tax filings and related tax services, tax planning, and other services as permitted by SEC regulations. The audit committee will not permit engaging the independent auditor (1) in connection with a transaction, the sole purpose of which may be impermissible tax avoidance, (2) for other tax services that may be prohibited by SEC rules now or in the future or (3) to perform services under contingent fee arrangements.
 
All Other Services

If permissible other services requested by Epic business units must be pre-approved by the audit committee.  
 
 
31

 
 
Prohibited Services

Independent auditors may not provide the following prohibited services: Bookkeeping, Financial Information Systems Design and Implementation, Appraisals or Valuation (other than Tax), Fairness Opinions, Actuarial Services, Internal Audit Outsourcing, Management Functions, Human Resources such as Executive Recruiting, Broker-dealer Services, Legal Services, or Expert Services such as providing expert testimony or opinions where the purpose of the engagement is to advocate the client's position in an adversarial proceeding.  Epic personnel may not under any circumstances engage the independent auditor for prohibited services. Potential engagements not clearly permissible should be referred to the Epic CFO.  

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) and (a) (2) Financial Statements and Financial Statement Schedules
 
Audit Reports of Independent Registered Public Accounting Firms
F2
   
Consolidated Balance Sheets
F3
   
Consolidated Statements of Operations
F4
   
Consolidated Statements of Cash Flows
F6
   
Consolidated Statements of Stockholders’ Equity
F5
   
Notes to Consolidated Financial Statements
F7

All other schedules are omitted because the required information is not applicable or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the Consolidated Financial Statements and Notes thereto.
 
(b) Exhibits. The following exhibits are filed with or incorporated by reference into this report on Form 10-K:

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.
 
Incorporated by reference, and as same exhibit number, from the Company's Registration Statement on Form SB-2 filed on January 4, 2008 (Commission File No. 333-148479).
         
3.3
 
Bylaws.
 
Incorporated by reference, and as same  exhibit number, from the Company's    Registration Statement on Form  SB-2 filed on January 4, 2008 (Commission File No. 333-148479).
         
4.1
 
Incentive Stock Option Plan.
 
Incorporated by reference to Exhibit 4(B), from the Company's    Registration Statement on Form  S-8 filed on January 29, 2007 (Commission File No. 333-140292).
 
32

 
Exhibit
Number
 
Exhibit Name
   
         
4.2
 
Non-Qualified Stock Option Plan.
 
Incorporated by reference to Exhibit 4(C), from the Company's    Registration Statement on Form  S-8 filed on January 29, 2007 (Commission File No. 333-140292).
         
4.3
 
Stock Bonus Plan.
 
Incorporated by reference to Exhibit 4(D), from the Company's    Registration Statement on Form  S-8 filed on January 29, 2007 (Commission File No. 333-140292).
         
10.1
 
Agreement relating to the acquisition of the Carnrite Group, LLC.
 
Incorporated by reference to Exhibit 10 to the Company's report on Form 8-K dated August 10, 2007.
         
10.2
 
Agreement relating to the acquisition of Pearl Investment Company.
 
Incorporated by reference to Exhibit 10.1 to the Company's report on Form 8-K dated December 5, 2007.
         
10.3
 
Securities Purchase Agreement (together with schedule required by Instruction 2 to Item 601 of Regulation S-K) pertaining to the sale of common stock and warrants.
 
Incorporated by reference to Exhibit 10.2 to the Company's report on Form 8-K dated December 5, 2007.
         
10.4
 
Purchase Agreement (together with schedule required by Instruction 2 to Item 601 of Regulation S-K) pertaining to the sale of the notes and warrants.
 
Incorporated by reference to Exhibit 10.3 to the Company's report on Form 8-K dated December 5, 2007.
         
10.5
 
Agreement relating to the acquisition of Epic Integrated Solutions LLC.
 
Incorporated by reference to exhibit 10 to the Company’s report on Form 10-K filed on April 4, 2008.
         
10.6
 
Employment Agreement R. Rhinesmith.*
 
Incorporated by reference to Exhibit 10.6 to the following Form S-1/A filed May 13, 2008.
         
10.7
 
Employment Agreement with Patrick Murray.*
 
Incorporated by reference to Exhibit 10.6 to the Company’s Form S-1/A filed May 13, 2008.
         
10.8
 
Gas Purchase Agreement with IACX Energy, LLC.
 
Incorporated by reference to exhibit 10.8 to the Company; Form S-1/A filed July 9, 2008.
         
10.9
 
Consulting Agreement with R. Rhinesmith.*
 
Incorporated by reference to Exhibit 10.9 to the Company; Form S-1/A filed July 9, 2008.
         
10.10
 
Separation and Release Agreement with D. Reynolds.*
 
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 3, 2008.
         
10.11
 
Amendment Agreement dated February 26, 2009.
 
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed March 2, 2009.
         
16.
 
Letter Re Change in Certifying Accountant.
 
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed September 15, 2009.
 
 
33

 

Exhibit
Number
 
Exhibit Name
   
         
31.1
 
Certification of Principal Executive Officer and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
         
31.2
 
Certification of Principal Financial Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002.
   
         
32.
 
Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
   

* Management contracts or compensatory plans or arrangements.
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act Of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
EPIC ENERGY RESOURCES, INC.
 
   
Date:  March 30,2010
/s/ John S. Ippolito
 
John S. Ippolito
 
Chief Executive Officer, President and Principal
Executive Officer
   
Date:  March 30, 2010
/s/ Michael Kinney
 
Michael Kinney
 
Chief Financial Officer, Executive Vice President
and Principal Accounting Officer
   
Pursuant to the requirements of the Securities Exchange Act Of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
   
Date:  March 30, 2010
/s/W.Robert Eissler
 
W.Robert Eissler, Director
   
Date:  March 30, 2010
/s/Dr. Robert Ferguson
 
Dr. Robert Ferguson, Director
   
Date:  March 30, 2010
/s/John Otto
 
John Otto, Director
   
Date:  March 30, 2010
/s/Alan Carnrite
 
Alan Carnrite, Director
   
Date:  March 30, 2010
/s/Tamer El-Rayess
 
Tamer El-Rayess, Director
   
Date:  March 30, 2010
/s/Martin Lipper
 
Martin Lipper, Director
 
 
34

 
 
ITEM 7. FINANCIAL STATEMENTS
 
The following financial statements and schedules that constitute Item 7 are filed as a part of this annual report.
 
Reports of Independent Registered Public Accounting Firms
 
     F-2
     
Consolidated Balance Sheets as of December 31, 2009 and 2008
  F-4
     
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008
  F-5
     
  F-6
     
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
  F-7
 
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 sheet of Epic Energy Resources, Inc. (the “Company”) as of December 31, 2009 and the related statements of losses, stockholders' equity and cash flows for the twelve month period then ended.  The financial statements for the year ended December 31, 2008 were audited by other auditors whose report expressed an unqualified opinion on those statements.  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 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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Epic Energy Resources, Inc. as of December 31, 2009 and the results of its operations and cash flows for the period described above in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The Company sustained a significant net loss in the current year, experienced a substantial revenue decrease and maintains a working capital deficit. These matters raise substantial doubt about the Company’s ability to continue as a going concern.  These financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern. See note 1 to the financial statements for further information regarding this uncertainty.

M&K CPAS, PLLC

www.mkacpas.com
Houston, Texas
March 22, 2010
 
 
F-2

 
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, 2008 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 2008. 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, 2008 and the results of operations and cash flows for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/ MALONE & BAILEY, PC
www.malone−bailey.com
Houston, Texas
March 25, 2009
 
 
F-3


EPIC ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

   
December 31,
 
 
 
2009
   
2008
 
ASSETS             
Current Assets
           
Cash and cash equivalents
  $ 153     $ 4,785  
Accounts receivable:
               
Billed, net of allowance of $185 and $6,570, respectively
    6,348       10,690  
Unbilled
    760       388  
Prepaid expenses and other current assets
    407       2,027  
Total current assets
    7,668       17,890  
Property and equipment, net
    2,231       5,136  
Assets held for sale:
               
Proved oil and gas properties (full cost method, net of accumulated impairments and depletion of $0 and $9,257, respectively)
    -       1,332  
Other mineral reserves
    -       783  
Other assets held for sale
    -       3,875  
Other assets
    39       45  
Debt issuance costs, net of accumulated amortization of $913 and $481, respectively
    1,116       1,548  
Goodwill
    8,919       18,837  
Other intangible assets, net
    8,906       12,666  
Total assets
  $ 28,879     $ 62,112  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable
  $ 2,506     $ 5,404  
Accrued liabilities
    3,753       3,762  
Deferred revenue
    2,593       2,684  
Customer deposits
    949       4,505  
Current liabilities associated with assets held for sale
    -       4,383  
Current portion of long term debt
    7,416       7,504  
Total current liabilities
    17,217       28,242  
Long-term liabilities associated with assets held for sale
    -       3,949  
Long-term debt
    4,561       6,372  
Derivative liability
    1,965       -  
Deferred tax liability
    1,351       1,775  
Total liabilities
    25,094       40,338  
STOCKHOLDERS' EQUITY
               
Preferred stock, no par value: 10,000,000 authorized, no shares issued and outstanding
    -       -  
Common stock, no par value: 100,000,000 authorized, 44,105,781 and 43,495,160 shares issued and outstanding, respectively
    33,639       41,783  
Additional paid-in capital
    1,924       15,014  
Accumulated deficit
    (31,778 )     (35,023 )
Total stockholders’ equity
   
3,785
      21,774  
Total liabilities and stockholders’ equity
  $ 28,879     $ 62,112  
 
See accompanying notes to consolidated financial statements.
 
F-4

 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data and per share data)

   
Years Ended December 31,
 
   
2009
   
2008
 
REVENUES
           
Consulting fees
  $ 27,125     $ 39,605  
Reimbursed expenses
    20,410       32,595  
Total  revenues
    47,535       72,200  
OPERATING EXPENSES
               
Reimbursed expenses
    14,882       29,508  
Compensation and benefits
    18,833       26,204  
General and administrative
    4,904       12,971  
Professional and subcontracted services
    4,008       7,421  
Occupancy, communication and other
    1,192       1,375  
Depreciation and amortization
    3,240       8,147  
Impairment of goodwill
    9,918       -  
Impairment of intangible assets
    2,043       1,505  
Impairment of assets held for sale
    480       330  
Total operating expenses
    59,500       87,461  
Loss from operations
    (11,965 )     (15,261 )
OTHER INCOME (EXPENSE)
               
Interest expense
    (6,843 )     (6,207 )
Derivative loss
    (1,177 )     -  
Interest and other income (expense), net
    87       (309 )
Total other expense, net
    (7,933 )     (6,516 )
Loss from continuing operations before taxes
    (19,898 )     (21,777 )
Income tax expense (benefit)
    (404 )     10  
Loss from continuing operations
    (19,494 )     (21,787 )
DISCONTINUED OPERATIONS
               
Loss from operations of oil and gas segment
    (162 )     (4,785 )
Gain on sale of oil and gas properties
    2,110       -  
Income (loss) from discontinued operations
    1,948       (4,785 )
                 
Net loss
  $ (17,546 )   $ (26,572 )
                 
Income (loss) per common share - basic and diluted:
               
Loss from continuing operations
  $ (0.44 )   $ (0.51 )
Income (loss) from discontinued operations
    0.04     $ (0.11 )
Net loss
  $ (0.40 )   $ (0.62 )
                 
Weighted average common shares outstanding - basic and diluted
    44,073,925       43,014,409  
 
See accompanying notes to consolidated financial statements.
 
F-5

EPIC ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
 
   
Common Stock
   
Additional
Paid-In
   
Accumulated
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
BALANCE, December 31, 2007
    42,948,921     $ 40,699     $ 13,417     $ (8,451 )   $ 45,665  
Shares issued for the acquisition of EIS
    333,333       1,050       -       -       1,050  
Shares issued for services
    146,239       34       -       -       34  
Issuance of vested shares
    66,667       -       -       -       -  
Amortization of stock options and  stock bonuses
    -       -       1,287       -       1,287  
Warrants issued for debentures
    -       -       310       -       310  
Net loss
    -       -       -       (26,572 )     (26,572 )
BALANCE, December 31, 2008
    43,495,160     $ 41,783     $ 15,014     $ (35,023 )   $ 21,774  
Cumulative effect of change in accounting principle
    -       (8,144 )     (13,395 )     20,791       (748 )
BALANCE, December 31, 2008, as adjusted
    43,495,160     $ 33,639     $ 1,619     $ (14,232 )   $ 21,026  
Issuance of vested shares
    610,621       -       -       -       -  
Amortization of stock options and  stock bonuses
    -       -       305       -       305  
Net loss
    -       -       -       (17,546 )     (17,546 )
                                         
BALANCE, December 31, 2009
    44,105,781     $ 33,639     $ 1,924     $ (31,778 )   $ 3,785  
 
See accompanying notes to consolidated financial statements.
 
F-6

 
EPIC ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
   
Years Ended December 31,
 
   
2009
   
2008
 
OPERATING ACTIVITIES:
           
Net loss
  $ (17,546 )   $ (26,572 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
(Income) loss from discontinued operations
    (1,948 )     4,785  
Depreciation and amortization
    3,240       8,147  
Allowance for doubtful accounts
    133       5,934  
Amortization of debt discount and debt issuance costs
    4,753       3,691  
Loss on sale of accounts receivable
    47       -  
Loss on sale / disposal of property and equipment
    690       749  
Loss on sale of asset held for sale
    648       -  
Stock based compensation expense
    305       1,321  
Impairment charges
    12,441       1,835  
Derivative loss
    1,177       -  
Deferred taxes
    (424 )     -  
Gain on early extinguishment of debt
    (94 )     -  
Changes in operating assets and liabilities:
               
Accounts receivable, billed and unbilled
    2,348       (1,973 )
Prepaid expenses and other current assets
    1,620       (1,713 )
Other non-current assets
    7       163  
Accounts payable
    (3,022 )     1,265  
Accrued liabilities
    (9 )     1,062  
Deferred revenue
    (92 )     2,684  
Customer deposits
    (3,556 )     3,147  
Net cash provided by operating activities
    718       4,525  
INVESTING ACTIVITIES:
               
Purchases of property and equipment
    (270 )     (1,396 )
Proceeds from sale of property and equipment
    55       665  
Use of restricted cash
    -       2,492  
Acquisition of EIS, net of cash received
    -       (232 )
Net cash provided by (used in) investing activities
&