Attached files
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EX-32 - EX-32 - EPIC ENERGY RESOURCES, INC. | v193043_ex32.htm |
EX-31.1 - EX-31.1 - EPIC ENERGY RESOURCES, INC. | v193043_ex31-1.htm |
EX-31.2 - EX-31.2 - EPIC ENERGY RESOURCES, INC. | v193043_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
quarterly period ended June 30, 2010
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _______ to ________.
Commission
File Number 0-31357
EPIC ENERGY RESOURCES,
INC.
|
|
(Exact
name of registrant as specified in its charter)
|
|
Colorado
|
94-3363969
|
(State
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
1450
Lake Robbins Drive, Suite 160
The Woodlands, TX 77380
|
|
(Address
of principal executive offices)
|
|
(281) 419-3742
|
|
(Registrant's
telephone number, including area
code)
|
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES ¨ NO ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer” and
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer (Do not check if a smaller reporting company) ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): YES ¨ NO x
As of
July 31, 2010, the Company had 82,654,594 issued and outstanding shares of
common stock.
EPIC ENERGY RESOURCES
INC.
Table
of Contents
|
Page
|
|
PART I — FINANCIAL INFORMATION | ||
Item 1.
Financial Statements
|
2
|
|
Consolidated
Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009
|
2
|
|
Consolidated
Statements of Operations for the three and six months ended June 30,
2010 and 2009 (unaudited)
|
3
|
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2010 and 2009
(unaudited)
|
4
|
|
Notes
to Unaudited Consolidated Financial Statements
|
5
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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13
|
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Item 4T.
Controls and Procedures
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16
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PART
II — OTHER INFORMATION
|
||
Item
1. Legal Proceedings
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|
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Item 6.
Exhibits
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17
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Signatures
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18
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Certification
Pursuant to Section 302
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||
Certification
Pursuant to Section 302
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||
Certification
Pursuant to Section 906
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1
PART
1. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
EPIC
ENERGY RESOURCES INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
(unaudited)
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 129 | $ | 153 | ||||
Accounts
receivable:
|
||||||||
Billed,
net of allowance of $301 and $185, respectively
|
2,689 | 6,348 | ||||||
Unbilled
|
546 | 760 | ||||||
Prepaid
expenses and other current assets
|
451 | 407 | ||||||
Total
current assets
|
3,815 | 7,668 | ||||||
Property
and equipment, net
|
1,836 | 2,156 | ||||||
Assets
held for sale
|
- | 75 | ||||||
Other
assets
|
27 | 39 | ||||||
Debt
issuance costs, net of accumulated amortization of $1,121 and $913,
respectively
|
908 | 1,116 | ||||||
Goodwill
|
7,933 | 8,919 | ||||||
Other
intangible assets, net
|
4,049 | 8,906 | ||||||
Total
assets
|
$ | 18,568 | $ | 28,879 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 2,274 | $ | 2,506 | ||||
Accrued
liabilities
|
1,788 | 3,753 | ||||||
Deferred
revenue
|
- | 2,593 | ||||||
Customer
deposits
|
1 | 949 | ||||||
Current
liabilities associated with assets held for sale
|
510 | 750 | ||||||
Current
portion of long-term debt
|
3,484 | 6,666 | ||||||
Total
current liabilities
|
8,057 | 17,217 | ||||||
Long-term
liabilities associated with assets held for sale
|
- | 320 | ||||||
Long-term
debt
|
11,953 | 4,241 | ||||||
Derivative
liability
|
- | 1,965 | ||||||
Deferred
tax liability
|
- | 1,351 | ||||||
Total
liabilities
|
20,010 | 25,094 | ||||||
STOCKHOLDERS'
EQUITY (DEFICIT)
|
||||||||
Preferred
stock, no par value: 20,000,000 authorized, 4,258,393 and 0 shares issued
and outstanding, respectively
|
4,258 | - | ||||||
Common
stock, no par value: 300,000,000 authorized; 82,654,594 and 44,105,781
shares issued and outstanding, respectively
|
37,862 | 33,639 | ||||||
Additional
paid-in capital
|
2,467 | 1,924 | ||||||
Accumulated
deficit
|
(46,029 | ) | (31,778 | ) | ||||
Total
stockholders’ equity (deficit)
|
(1,442 | ) | 3,785 | |||||
Total
liabilities and stockholders’ equity (deficit)
|
$ | 18,568 | $ | 28,879 |
See
accompanying notes to the unaudited consolidated financial
statements
2
EPIC
ENERGY RESOURCES INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data)
(unaudited)
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUES
|
||||||||||||||||
Consulting
fees
|
$ | 3,373 | $ | 6,771 | $ | 7,279 | $ | 13,967 | ||||||||
Reimbursed
expenses
|
1,794 | 3,411 | 3,728 | 4,636 | ||||||||||||
Total
revenues
|
5,167 | 10,182 | 11,007 | 18,603 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Reimbursed
expenses
|
710 | 1,823 | 1,958 | 2,826 | ||||||||||||
Compensation
and benefits
|
3,358 | 4,608 | 7,018 | 9,707 | ||||||||||||
General
and administrative
|
1,301 | 1,074 | 2,488 | 1,908 | ||||||||||||
Professional
and subcontracted services
|
944 | 886 | 1,646 | 1,867 | ||||||||||||
Occupancy,
communication and other
|
266 | 292 | 540 | 584 | ||||||||||||
Depreciation
and amortization
|
540 | 727 | 1,090 | 1,838 | ||||||||||||
Impairment
charges
|
- | 480 | 4,033 | 480 | ||||||||||||
Total
operating expenses
|
7,119 | 9,890 | 18,773 | 19,210 | ||||||||||||
Income
(loss) from operations
|
(1,952 | ) | 292 | (7,766 | ) | (607 | ) | |||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Derivative
loss
|
- | (2,421 | ) | (791 | ) | (2,626 | ) | |||||||||
Interest
expense
|
(1,090 | ) | (1,790 | ) | (2,351 | ) | (3,873 | ) | ||||||||
Interest
and other income (expense)
|
(4,811 | ) | (10 | ) | (3,862 | ) | 85 | |||||||||
Total
other expense, net
|
(5,901 | ) | (4,221 | ) | (7,004 | ) | (6,414 | ) | ||||||||
Loss
from continuing operations before taxes
|
(7,853 | ) | (3,929 | ) | (14,770 | ) | (7,021 | ) | ||||||||
Income
tax benefit
|
- | - | 1,351 | - | ||||||||||||
Loss
from continuing operations
|
(7,853 | ) | (3,929 | ) | (13,419 | ) | (6,897 | ) | ||||||||
DISCONTINUED
OPERATIONS
|
||||||||||||||||
Loss
from discontinued operations
|
(762 | ) | - | (832 | ) | (38 | ) | |||||||||
Gain
on sale of oil and gas properties
|
- | - | - | 2,110 | ||||||||||||
Income
(loss) from discontinued operations
|
(762 | ) | - | (832 | ) | 2,072 | ||||||||||
Net loss
|
$ | (8,615 | ) | $ | (3,929 | ) | $ | (14,251 | ) | $ | (4,949 | ) | ||||
Loss
per common share - basic and diluted:
|
||||||||||||||||
Loss
from continuing operations
|
$ | (.11 | ) | $ | (.09 | ) | $ | (.23 | ) | $ | (.16 | ) | ||||
Income
(loss) from discontinued operations
|
$ | (.01 | ) | - | $ | (.01 | ) | $ | .05 | |||||||
Net loss
|
$ | (.12 | ) | $ | (.09 | ) | $ | (.24 | ) | $ | (.11 | ) | ||||
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - Basic and Diluted
|
73,452,855 | 44,105,732 | 59,219,702 | 44,041,540 |
See
accompanying notes to the unaudited consolidated financial
statements
3
EPIC
ENERGY RESOURCES INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
loss
|
$ | (14,251 | ) | $ | (4,949 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in)
operating activities:
|
||||||||
(Income)
loss from discontinued operations
|
832 | (2,072 | ) | |||||
Depreciation
and amortization
|
1,090 | 1,838 | ||||||
Allowance
for doubtful accounts
|
353 | 206 | ||||||
Amortization
of debt discount and debt issuance costs
|
896 | 2,762 | ||||||
Stock-based
compensation expense
|
820 | 25 | ||||||
Impairment
of intangible assets
|
4,033 | - | ||||||
Impairment
of asset held for sale
|
- | 480 | ||||||
Loss
on sale of accounts receivable
|
40 | - | ||||||
Loss
on sale of property and equipment
|
59 | 173 | ||||||
(Gain)
loss on extinguishment of debt
|
4,839 | (94 | ) | |||||
Non-cash
interest expense
|
620 | - | ||||||
Derivative
loss
|
791 | 2,626 | ||||||
Deferred
taxes
|
(1,351 | ) | - | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
1,071 | 2,964 | ||||||
Prepaid
expenses and other current assets
|
(44 | ) | 1,435 | |||||
Other
non-current assets
|
12 | 3 | ||||||
Accounts
payable
|
340 | (4,668 | ) | |||||
Accrued
liabilities
|
(1,965 | ) | (692 | ) | ||||
Customer
deposits
|
(948 | ) | (3,166 | ) | ||||
Deferred
revenue
|
(2,593 | ) | 6,406 | |||||
Net
cash provided by (used in) operating activities
|
(5,356 | ) | 3,277 | |||||
INVESTING
ACTIVITIES:
|
||||||||
Purchases
of property and equipment
|
(205 | ) | (139 | ) | ||||
Proceeds
from sale of property and equipment
|
- | 52 | ||||||
Net
cash used in investing activities
|
(205 | ) | (87 | ) | ||||
FINANCING
ACTIVITIES:
|
||||||||
Proceeds
from debt
|
515 | - | ||||||
Payments
on debt
|
(442 | ) | (4,615 | ) | ||||
Proceeds
from issuance of preferred stock
|
3,160 | - | ||||||
Proceeds
from sale of accounts receivable
|
2,410 | - | ||||||
Net
cash provided by (used in) financing activities
|
5,643 | (4,615 | ) | |||||
DISCONTINUED
OPERATIONS:
|
||||||||
Net
cash provided by (used in) operating activities
|
(106 | ) | 84 | |||||
Net
cash used in financing activities
|
- | (153 | ) | |||||
Net
cash used in discontinued operations
|
(106 | ) | (69 | ) | ||||
Net
decrease in cash and cash equivalents
|
(24 | ) | (1,494 | ) | ||||
Cash
and cash equivalents, beginning of period
|
153 | 4,785 | ||||||
Cash
and cash equivalents, end of period
|
$ | 129 | $ | 3,291 | ||||
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
||||||||
Cash
paid for interest
|
$ | 486 | $ | 1,768 | ||||
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Settlement
of debt through issuance of common and preferred stock
|
$ | 4,424 | $ | - | ||||
Settlement
of accounts payable through debt issuance
|
$ | 573 | $ | - | ||||
Settlement
of obligations through sale of oil and gas properties
|
$ | - | $ | 4,225 | ||||
Cumulative
net effect of change in accounting principle
|
$ | - | $ | 748 |
See
accompanying notes to the unaudited consolidated financial
statements
4
EPIC
ENERGY RESOURCES INC
Notes
to Unaudited Consolidated Financial Statements
1. Organization,
Operations and Basis of Presentation
Epic
Energy Resources, Inc (“Epic”) was incorporated in Colorado in 1989. Epic was
relatively inactive until April 2006, when current management gained control and
became focused on energy related activities including consulting, engineering,
and oil and gas production activities. Epic previously consisted of its wholly
owned subsidiaries The Carnrite Group, LLC (“Carnrite”), Pearl Investment
Company and its wholly owned subsidiaries (“Pearl”) and Epic Integrated
Solutions, LLC (“EIS”). In December 2009, Epic merged Carnrite, Pearl and EIS
into a single subsidiary and formed Epic Integrated Services, Inc (“Epic IS”).
Epic and Epic IS (collectively the “Company”) is engaged primarily in providing
engineering, consulting, construction management, operations, maintenance, and
field and project management services to the oil, gas and energy industry. Epic
also has an operational joint venture with Argos Asset Management, LLC (“Argos”)
to co-invest in infrastructure related projects with the Company’s clients. It
is expected that the co-investment projects will primarily be projects in which
the Company provides engineering, design, construction management and
operational services related to pipeline, gathering and compression systems, and
including oil and gas processing facilities.
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America (“U.S. GAAP”) for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and disclosures required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended June
30, 2010, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2010. The balance sheet at December 31, 2009, has
been derived from the audited financial statements at that date but does not
include all of the information and disclosures required by U.S. GAAP for
complete financial statements. For further information, refer to the financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2009.
Going
Concern
The
accompanying consolidated financial statements have been prepared on a going
concern basis of accounting, which contemplates continuity of operations,
realization of assets and liabilities and commitments in the normal course of
business. The accompanying consolidated financial statements do not reflect any
adjustments that might result if the Company is unable to continue as a going
concern. The Company has experienced a dramatic decline in revenues;
negative working capital and capital deficits, all of which raise substantial
doubt about the Company's ability to continue as a going concern. The
Company has reduced cash required for operations by reducing operating costs and
reducing staff levels. In addition, the Company is working to manage its current
liabilities while it continues to make changes in operations to improve its cash
flow and liquidity position. The ability of the Company to continue as a going
concern and the appropriateness of using the going concern basis is
dependent upon the Company’s ability to generate revenue from the sale of its
services and the cooperation of the Company’s note holders to assist with
obtaining working capital to meet operating costs.
2.
Summary
of Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany accounts and transactions
have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
The Company’s significant estimates made in connection with the preparation of
the accompanying financial statements include the carrying value of goodwill and
intangible assets, revenue recognition on uncompleted contracts, allowance for
doubtful accounts, and the valuation of stock options and
warrants.
5
Reclassification
Certain
items from the December 31, 2009 balance sheet and the three and six months
ended June 30, 2009 statements of operations have been reclassified to conform
to the three and six months ended June 30, 2010 financial statement
presentation. There is no effect on net income, cash flows or stockholders’
equity as a result of these reclassifications.
Recent
Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board issued revised guidance
intended to improve disclosures related to fair value measurements. This
guidance requires new disclosures as well as clarifies certain existing
disclosure requirements. New disclosures under this guidance require separate
information about significant transfers in and out of level 1 and level 2 and
the reason for such transfers, and also require purchase, sale, issuance, and
settlement information for level 3 measurement to be included in the rollforward
of activity on a gross basis. The guidance also clarifies the requirement to
determine the level of disaggregation for fair value measurement disclosures and
the requirement to disclose valuation techniques and inputs used for recurring
and nonrecurring fair value measurements in either level 2 or level 3. This
accounting guidance is effective for the Company beginning the first quarter of
fiscal year 2010. The adoption of this guidance did not have a significant
impact on the Company’s financial statement disclosures.
3.
Property and Equipment
Property
and equipment consisted of the following at June 30, 2010 (in
thousands):
Computer
equipment
|
$ | 2,432 | ||
Office
furniture and equipment
|
1,015 | |||
Leasehold
improvements
|
636 | |||
Vehicles
|
56 | |||
Construction
in progress
|
18 | |||
4,157 | ||||
Less:
Accumulated depreciation and amortization
|
(2,321 | ) | ||
Total
property and equipment, net
|
$ | 1,836 |
Depreciation
expense for the three months and six months ended June 30, 2010 was $236,711 and
$465,619, respectively.
4.
Discontinued Operations
Divestiture of
EIS
In June
2010, the Company entered into settlement agreements (the “Settlement
Agreements”) to dispose of EIS. The Settlement Agreements were entered into with
the former owners of EIS whereby the former owners of EIS, Richard Harvey
(“Harvey”) and Joseph Wright (“Wright”), forgave the Company’s debt obligation
of $1,070,000 and its obligation to issue 333,334 shares of the Company’s common
stock. In exchange for the forgiveness of these obligations, the Company has
assigned certain assets to Harvey and has entered into a promissory note with
Wright. See note 6 for further discussion of the promissory note. For the six
months ended June 30, 2010, the Company has recorded the divestiture of EIS in
discontinued operations in the accompanying Consolidated Statements of
Operations. The assets and liabilities have been shown separately as assets held
for sale and liabilities associated with assets held for sale on the
accompanying Consolidated Balance Sheets. Assets and liabilities associated with
discontinued operations consisted of the following (in thousands):
June 30,
2010
|
December 31,
2009
|
|||||||
ASSETS
|
||||||||
Assets
held for sale:
|
||||||||
Property
and equipment, net
|
$ | - | $ | 87 | ||||
Assets
of discontinued operations
|
$ | - | $ | 87 | ||||
LIABILITIES
|
||||||||
Note
payable-current portion
|
$ | 510 | $ | 750 | ||||
Note
payable – long-term portion
|
- | 320 | ||||||
Liabilities
of discontinued operations
|
$ | 510 | $ | 1,070 |
6
Oil and Gas
Properties
In
February 2009, the Company sold its Kansas property and dissolved its joint
venture associated with its Oklahoma property. The Kansas property was sold to a
third party who assumed the note payable, including accrued but unpaid interest
totaling $3,993,071 at the acquisition date and the future profits interest in
the properties of Statesman Resources, Inc. subject to the Company’s retention
of an overriding royalty interest covering the Kansas property. For the six
months ended June 30, 2009, the Company recorded a $2,110,066 gain on the sale
of the Kansas property, which is included in discontinued operations in the
accompanying Consolidated Statements of Operations. At June 30, 2010, the
Company does not own any oil and gas properties.
5. Goodwill
and Other Intangible Assets
The
Company’s intangible assets consist of the following at June 30, 2010 (in
thousands):
Carrying
amount
|
Accumulated
amortization
|
Impairment
loss
|
Net book
value
|
|||||||||||||
Customer
relationships
|
$ | 6,565 | $ | (2,112 | ) | $ | (404 | ) | $ | 4,049 | ||||||
Backlog
|
5,124 | (5,124 | ) | - | - | |||||||||||
Employment
contracts
|
1,147 | (1,147 | ) | - | - | |||||||||||
Patent
|
64 | (64 | ) | - | - | |||||||||||
Indefinite-lived
trade name
|
4,033 | - | (4,033 | ) | - | |||||||||||
Total
|
$ | 16,933 | $ | (8,447 | ) | $ | (4,437 | ) | $ | 4,049 |
Amortization
expense related to the above intangible assets for the three months and six
months ended June 30, 2010 was $312,098 and $624,192, respectively.
The
aggregate amortization expense associated with intangible assets for the next
five years is estimated to be as follows (in thousands):
2010
(six months
remaining)
|
$ | 597 | ||
2011
|
1,194 | |||
2012
|
1,194 | |||
2013
|
1,064 | |||
Total
|
$ | 4,049 |
In June
2010, the Company entered into agreements to dispose of EIS. In connection with
the disposal of EIS, during the quarter ended June 30, 2010, the Company
recorded an impairment loss of $404,105 related to the balance of the customer
relationships which were attributable to EIS. Also during the quarter ended June
30, 2010, the Company recorded an impairment loss of $985,283 related to the
balance of goodwill which was attributable to EIS. For the three and the six
months ended June 30, 2010, these impairment losses are included in Loss from
discontinued operations in the accompanying Consolidated Statements of
Operations.
In
December 2009, Carnrite, Pearl, and EIS were merged into a single subsidiary,
Epic IS. In connection with the formation of Epic IS, during the three months
ended March 31, 2010, the Company began marketing its services under the Epic
brand name. As a result, the Company concluded that there was no future value to
the Carnrite, Pearl, and EIS trade names and during the six months ended June
30, 2010 recorded an impairment loss of $4,033,078, which was the balance of the
trade name intangible asset.
7
6.
Long-Term Debt
Debt
consists of the following at June 30, 2010 (in thousands):
10%
secured debentures
|
$ | 13,922 | ||
Notes
payable secured by assets acquired
|
1,515 | |||
Total
debt
|
15,437 | |||
Less:
current maturities
|
(3,484 | ) | ||
Total
long-term debt
|
$ | 11,953 |
10% secured
debentures
The
Company has $20,250,000 of 10% Secured Debentures (the “Debentures”), which were
sold under a Purchase Agreement (the “Purchase Agreement”). The Debentures are
due on December 5, 2012, with interest and principle payable quarterly. Any
overdue accrued and unpaid interest results in a late fee at an interest rate
equal to the lesser of 18% per annum or the maximum rate permitted by
law. Prepayment is not allowed without prior written consent of the
holders of the Debentures. The purchasers of the Debentures also received
warrants which entitled the holders to purchase up to 15,954,545 shares of
common stock at $1.65 per share. Under the Black-Scholes method using
an expected life of five years, volatility of 72% and a risk-free interest rate
of 3.28%, the Company determined these warrants had a relative fair value of
$13,085,380 as of the date of the transaction. The relative fair
value of the warrants was originally recorded as additional paid in capital with
a corresponding amount recorded as a debt discount. Upon adoption of
new accounting guidance the debt discount was adjusted and the fair value of the
warrants was reclassified to a derivative liability, see note 9 for further
discussion. The debt discount was amortized to interest expense using the
effective interest method over the life of the debentures. For the
three and six months ended June 30, 2010, $0 and $688,251, respectively, of debt
discount was amortized to interest expense.
On April
9, 2010, the Company entered into a Series D Warrant Exchange Agreement.
Pursuant to the Series D Warrant Exchange Agreement, the Company issued 379,870
shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) and
11,753,181 shares of its common stock in exchange for the cancellation of
17,071,363 outstanding Series D Warrants. As a result of the cancellation of the
Series D Warrants the remaining balance of the debt discount was written off and
for the three and six months ending June 30, 2010, the Company recorded a loss
from extinguishment of debt of $4,275,886 related to the Series D Warrant
Exchange Agreement. The loss on extinguishment of debt is included in Interest
and other income (expense), in the accompanying Consolidated Statements of
Operations.
On April
9, 2010, the Company entered into a Series C Warrant Exchange Agreement with the
holders of the Series C Warrants. Under this agreement the Company issued 71,429
shares of its Series A Preferred Stock and 4,547,001 shares of its common stock
in exchange for the cancellation of all 5,613,668 outstanding Series C
Warrants. The holders of Series C Warrants also waived the Company’s
breach of a registration obligation (pursuant to a registration rights
agreement) and the right to collect liquidated damages and interest. As a
result, for the three and six months ending June 30, 2010, the Company recorded
a gain from extinguishment of debt of $117,243 related to the Series C Warrant
Exchange Agreement. The gain on extinguishment of debt is included in Interest
and other income (expense), in the accompanying Consolidated Statements of
Operations.
On April
9, 2010, the Company entered into a Debenture Exchange Agreement with certain
Holders whereby the Company issued 14,000,000 shares of its common stock to
certain Holders in exchange for forgiveness of an aggregate of $1,000,000
principal amount of Debentures. As a result, for the three and six
months ending June 30, 2010, the Company recorded a loss from extinguishment of
debt of $680,000 related to the Debenture Exchange Agreement. The loss on
extinguishment of debt is included in Interest and other income (expense), in
the accompanying Consolidated Statements of Operations.
On
February 26, 2009, the Company entered into an Amendment Agreement (the
“Amendment”) with the majority of the holders of the Debentures (the “Holders”).
Under the Amendment, the Holders agreed to waive any events of default 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. In addition, the
Amendment provides that for each three-month period commencing on January 1,
2010 and ending on each March 31, June 30, September 30 and December 31
thereafter, the Company is to generate, on a consolidated basis, EBITDA of at
least $1,000,000. The Amendment also provides that until June 30, 2010, the
Company is permitted to only issue up to a maximum aggregate of 10,000,000
common stock (with options and warrants counted as shares of common stock)
(subject to adjustment) to employees, consultants, officers, directors and
advisors. The Company also will not issue any shares of common stock
or options or warrants to employees, consultants, officers, directors or
advisors with a strike price, conversion price, exercise price, or at an
effective purchase price per share, less than $0.50 (subject to adjustment)
until the earlier of (i) such time that the Holders no longer hold any of the
Company’s securities or (ii) one year prior to the expiration date of the
warrants (regardless of whether any or all warrants have been exercised).
Finally, it places limitations on increases to executive compensation beyond the
2008 levels for calendar years 2009 and 2010. The limitations shall
last until the end of calendar year 2010, or until such time that the Company’s
annual EBITDA (as derived from audited financial statements) exceeds $7,000,000,
or the holders of at least 67% in principal amount of the then outstanding
Debentures shall have otherwise given their prior written consent to terminate
the limitations.
8
On
December 1, 2009, the Company entered into a second Amendment Agreement (the
“Second Amendment”) with the Holders. The Second Amendment deferred the
Company’s December 1, 2009 Debenture payment to the Holders until November 30,
2010 (the “Deferral Period”). During the Deferral Period, the annual interest
rate was increased from 10% to 12%.
The
Company did not make its March 1, 2010 principal payment on the Debentures and
this resulted in an event of default under the Debentures. The debenture holders
agreed to defer the payments and waive the covenants based upon the following
agreements. On April 9, 2010, the Company entered into a Waiver and
Amendment to the Debentures with 98% of the Holders and an Amendment to
Securities Purchase Agreement with all of the Holders (collectively the “Waiver
and Amendment agreements”). Pursuant to the Waiver and Amendment agreements, the
Company issued 147,094 shares of Series A Preferred Stock and 3,940,678 shares
of its common stock in exchange for the consent to defer principal payments and
amend or waive certain covenants pertaining to the Debentures. The Company
agreed to redeem all of the Debentures held by the Holders that did not agree to
the Waiver and Amendment agreements.
Notes payable secured by
assets acquired
The
Company has a $100,000 note payable related to tenant improvements at its
expanded Lakewood, CO office. The 5 year note with a 5% annual interest
rate is due on May 1, 2012, with principal and interest payable monthly.
At June 30, 2010, this note payable had a balance of $37,869.
The
Company has a $872,909 note payable related to its Microsoft ERP system
implementation. The 3 year note with a 7.25% annual interest rate was due
on June 18, 2010, with principal and interest payable monthly. During the
quarter ended June 30, 2010, the Company paid off the remaining balance of this
note.
The
Company has a note payable for $1,108,330 to cover the deficiency from the sale
of its airplane (the “Airplane Note”). The Airplane Note is a 4 year note and
with a 5.25% annual interest rate. The Airplane Note required an initial payment
of $471,475 on December 23, 2009 and beginning January 23, 2010, principal and
interest are payable monthly. At June 30, 2010, the Airplane Note had a balance
of $489,809. To fund the initial payment required on the Airplane Note
(discussed above), the Company entered into a 2 year note payable (“2 Year
Note”) for $500,000. The 2 Year Note with a 10% annual interest rate is due on
December 21, 2012 with principal and interest payable monthly beginning January
1, 2010. At June 30, 2010, the 2 Year Note had a balance of
$444,984.
In June
2010, the Company entered into a promissory note for $573,400 with a vendor (the
“Vendor note”) for all unpaid amounts due to the vendor. The Vendor note bears
interest at 7%, with interest and principal payable monthly through May 15,
2011.
Note payable –
Other
In
connection with the acquisition of EIS, the Company had a $1,400,000 note
payable (the “EIS Note”) which was to be paid to the prior owners of EIS in
periodic installments. The EIS Note was payable in monthly installments through
January 1, 2011. In June 2010, the Company entered into the Settlement agreement
which forgave to outstanding balance of the EIS note. Simultaneously with the
execution of the Settlement agreement, the Company entered into a promissory
note for $535,000 with Wright (the “Wright Note”) for the balance owed to him
under the EIS Note. The Wright Note provides for five monthly payments, with the
first payment due June 22, 2010. The Wright Note also states that if the Company
makes the first four payments as specified in the promissory note then Wright
will forgive the fifth and final payment of $445,000. At June 30, 2010, the
Wright Note had a balance of $510,000 and is included in Current liabilities
associated with assets held for sale in the accompanying Consolidated Balance
Sheets.
9
On March
4, 2010, the Company entered into a bridge loan to meet short term working
capital needs (the “Bridge Loan”) with Castex New Ventures, L.P. (“Castex”), for
an aggregate amount of $500,000. The Bridge Loan bears interest at
the rate of 10% per annum. All principal outstanding on the Bridge
Loan is payable at maturity, which is the earliest of (i) three business days
following written demand from Castex, (ii) June 1, 2010, and (iii) the date on
which Castex’s obligation to make additional loans to the Company is terminated
pursuant to a default, as that term is defined in the Bridge Loan (such earliest
date, the “Maturity Date”). Interest is payable on the date of any
repayment of any loans and on the Maturity Date. In April 2010, the Company
issued Series A Preferred Stock in exchange for the forgiveness of the Bridge
Loan. See note 7 for further discussion.
7.
Stockholders' Equity
During
the six months ended June 30, 2010, the Company issued 944,620 shares of common
stock to certain employees of Epic IS. These shares are related to the
acquisition of Pearl in 2007 and were issued in the six months ended June 30,
2010, upon the vesting of such shares.
During
the six months ended June 30, 2010, the Company issued 333,333 shares of common
stock to the prior owners of EIS upon the vesting of such shares.
During
the six months ended June 30, 2010, the Company issued 3,030,000 shares of
common stock for services, of which
30,000
shares were issued to non-employee directors and 3,000,000 shares were issued to
an entity as a finder’s fee commission. The common stock was valued at the price
on the date of issuance which was an aggregate of $276,600. For the six months
ended June 30, 2010, $270,000 of the stock value is included in compensation and
benefits and $6,600 is included in professional and subcontracted services in
the accompanying Consolidated Statements of Operations.
On April
9, 2010, the Company entered into a Subscription Agreement (the “Subscription
Agreement”) with accredited investors in connection with the private issuance
and sale (the “Private Placement”) of 3,660,000 shares of the Company’s Series A
Preferred Stock. Under the Private Placement, the Company sold 3,160,000 shares
of Series A Preferred Stock in the Private Placement for $1.00 per
share. Also, pursuant to the Private Placement, the Company issued
500,000 shares of Series A Preferred Stock to Castex in exchange for the
forgiveness of the Bridge Loan in the amount of $500,000. Each share of Series A
Preferred Stock will be convertible into 14 shares of common stock.
On April
9, 2010, simultaneously with the Private Placement the Company entered into the
following agreements:
The
Company entered into a Debenture Exchange Agreement whereby the Company issued
14,000,000 shares of its common stock in exchange for forgiveness of an
aggregate of $1,000,000 principal amount of Debentures.
The
Company entered into a Waiver and Amendment to Debentures with 98% of the
Holders and an Amendment to Securities Purchase Agreement with all of the
Holders. Pursuant to these agreements, the Company issued 147,094 shares of
Series A Preferred Stock and 3,940,678 shares of its common stock in exchange
for the consent to defer principal payments and amend or waive certain covenants
pertaining to the Debentures.
The
Company entered into a Series D Warrant Exchange Agreement which provided that
the Company issued 379,870 shares of Series A Preferred Stock and 11,753,181
shares of its common stock in exchange for the cancellation of all 17,071,363
outstanding Series D Warrants.
The
Company entered into a Series C Warrant Exchange Agreement under which the
Company issued 71,429 shares of its Series A Preferred Stock and 4,547,001
shares of its common stock in exchange for the cancellation of all 5,613,668
outstanding Series C Warrants.
8.
Stock Based Compensation
Stock
Options
During
the six months ended June 30, 2010, the Company granted 6,621,010 stock
options to the Company’s senior management, employees, and the board of
directors. These options have an exercise price of $0.50 per share and expire 10
years from the day they were granted. These options vest over a three year
period. For the three and six months ended June 30, 2010, $60,214 and $262,671,
respectively of compensation expense was recorded related to these
options. Unrecognized compensation expense of approximately $182,757
will be recognized over the remaining vesting period of these
options.
The fair
value of the options discussed above was estimated on the grant date using the
Black-Scholes option-pricing model with an expected life of 2.1 to 3 years,
volatility of 192.7% to 192.8%, and a risk free interest rate of 0.71% to
1.7%.
10
A summary
of stock option activity for the six months ended June 30, 2010 is as
follows:
Number of
Shares
|
Weighted
Average
Exercise Price
|
|||||||
Options
outstanding, January 1, 2010
|
1,848,900 | $ | 1.84 | |||||
Options
granted
|
6,621,010 | $ | 0.50 | |||||
Options
forfeited
|
(1,962,978 | ) | $ | 0.51 | ||||
Options
expired
|
(50,000 | ) | $ | 3.00 | ||||
Options
outstanding, June 30, 2010
|
6,456,932 | $ | 0.86 |
9.
Derivative Liability and Fair Value Measurements
The
Company measures its derivative liability associated with its warrants to
purchase the Company’s common stock at fair value on a recurring
basis.
The
Company had 22,685,031 outstanding warrants containing exercise price reset
provisions which were not deemed to be indexed to the Company’s
stock. The fair values of these warrants were recoded as a
derivative liability. These warrants had exercise prices ranging from $1.50 -
$1.65 and were scheduled to expire in December 2012. The change in fair value
during the three and six months ended June 30, 2010 of $0 and $791,162,
respectively, is recorded as derivative losses in the accompanying Consolidated
Statements of Operations.
As
discussed in Note 7, the Company entered into Series D and Series C Warrant
Exchange Agreements which provided for the cancellation of all 22,685,031
outstanding warrants. As a result the derivative liability was written
off.
The
Company classified the fair value of these warrants under level three. The fair
value of the derivative liability was calculated using the Black-Scholes model.
Under the Black-Scholes model using an expected life of 3.0 years, volatility of
193% and a risk-free interest rate of 1.7%, the Company determined the fair
value of the warrants to be $1,964,591 at December 31, 2009. Under the
Black-Scholes model using an expected life of 2.75 years, volatility of 192% and
a risk-free interest rate of 1.46%, the Company determined the fair value of the
warrants to be $2,755,753 at March 31, 2010. As the cancellation of the warrants
occurred on April 9, 2009, no additional fair value adjustments were
made.
10.
Income taxes
For the
six months ended June 30, 2010, the Company recorded a deferred tax benefit of
approximately $1,351,000 related to the reversal of a deferred tax liability.
The deferred tax liability was related to the trade name intangible asset and
due to the impairment of the remaining trade name during the six months ended
June 30, 2010, the balance of the deferred tax liability was
adjusted.
11.
Commitments and Contingencies
Litigation
A former
employee has filed a case against the Company alleging that the Company
terminated such employee without good cause. Arbitration for this case is
scheduled for August 2010. At June 30, 2010, the Company has $400,000 accrued
related to this case which represents the estimated potential loss.
From time
to time, the Company may be involved in litigation or administrative proceedings
relating to claims arising out of our operations in the normal course of
business. The Company is not aware of any pending of threatened legal
proceedings that, if determined in an adverse manner, could have a material
adverse effect on the Company’s business and operations.
11
Auction
Agreement
The
Company has an auctioning agreement (the “Agreement”) with The Receivables
Exchange, LLC (“TRE”). Under the Agreement the Company sells its accounts
receivables to TRE who in return advances cash of approximately 85% of the total
amount of the accounts receivable auctioned. TRE retains 15% of the outstanding
auctioned accounts receivable as a reserve, which it holds until the customer
pays the auctioned 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. For the three and six months
ended June 30, 2010, the Company recognized a loss on the sale of accounts
receivable of $3,864 and $39,969, respectively and paid fees of
$1,823 and $17,144 related to the sale of $2,580,629 of accounts receivables. At
June 30, 2010, the Company has retained accounts receivable of $381,227, related
to the receivables auctioned which are included in Accounts receivable in the
accompanying Consolidated Balance Sheets.
12. Subsequent
events
There
were no significant subsequent events through the date the financial statements
were issued.
12
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
discussion in this section contains forward-looking statements. These statements
relate to future events or our future financial performance. We have attempted
to identify forward-looking statements by terminology such as "anticipate,"
"believe," "can," "continue," "could," "estimate," "expect," "intend," "may,"
"plan," "potential," "predict," "should," "would" or "will" or the negative of
these terms or other comparable terminology, but their absence does not mean
that a statement is not forward looking. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors, which
could cause our actual results to differ from those projected in any
forward-looking statements we make This discussion should be read with our
financial statements and related notes included elsewhere in this
report.
Overview
Epic
began operating in the oil and gas industry in April 2006. Epic acquired
Carnrite in August 2007, Pearl in December 2007 and EIS in February
2008. In December 2009, Epic merged its three operating
subsidiaries, Carnrite, Pearl and EIS, into a single operating subsidiary and
formed Epic Integrated Services, Inc or Epic IS. With respect to this
discussion, the terms “the Company”, “we,” “us,” and “our” refer to Epic Energy
Resources, Inc. and Epic IS, our wholly-owned subsidiary.
Results of
Operations
Epic,
through its operating subsidiary, Epic IS, 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
its 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
July 31, 210, the Company’s backlog for consulting services to be performed in
the future was approximately $11.7 million. This compares with a combined
backlog of approximately $28.0 million as of July 31, 2009. This backlog amount
could change by macro-economic market activity and customer demand
changes.
Three
Months ended June 30, 2010 compared with Three Months ended June 30,
2009
Revenues were approximately $5.2
million for the quarter ended June 30, 2010 compared to approximately $10.2
million for the quarter ended June 30, 2009. The decrease of $5.0 million was
primarily related to a decline in revenues from consulting fees. 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 were approximately $7.1 million for the quarter ended June 30,
2010 compared to approximately $9.9 million for the quarter ended June 30, 2009.
The $2.8 million decrease was primarily related to a $1.1 million decrease in
reimbursed expenses as it relates to the decrease in revenues from reimbursed
expenses and a $1.3 million decrease in compensation and benefits that resulted
from a reduction in the number of employees and salary reductions.
Income (loss)
from Operations was approximately $(1.9) million for the quarter ended
June 30, 2010 compared to $0.3 million for the quarter ended June 30,
2009.
Other Expense,
net was approximately $5.9 million for the quarter ended June 30, 2010
compared to approximately $4.2 million for the quarter ended June 30,
2009. The increase of other expense of $1.7 million was primarily due
to the net loss on extinguishment of debt of $4.8 million offset by the increase
of the loss on the derivative liability of $2.4 million.
13
Net
Loss was $8.6 million or $0.12 per share for the quarter ended
June 30, 2010 compared to $3.9 million or $0.09 per share for the quarter ended
June 30, 2009 resulting in an increased loss of
$4.7 million. The primary reasons for the net loss for the
three months ended June 30, 2010 was the net loss on extinguishment of debt of
$4.8 million and $1.1 million of interest expense recognized during that
period.
Six
Months ended June 30, 2010 compared with Six Months ended June 30,
2009
Revenues were approximately $11.0
million for the six months ended June 30, 2010 compared to approximately $18.6
million for the six months ended June 30, 2009. The decrease of $7.6 million was
primarily related to a $6.7 million decrease in consulting fees.
Operating
Expenses were approximately $18.8 million for the six months ended June
30, 2010 compared to approximately $19.2 million for the six months ended June
30, 2009. This decrease of $0.4 million was primarily related to a
$2.7 million decrease in compensation and benefits and a $0.9 million decrease
in reimbursed expenses as it relates to the decrease in revenues from reimbursed
expenses, and a $0.2 million
decrease in professional and subcontracted services. These decreases were offset by a $4.0 million loss on
impairment of intangible assets recorded during the six months ended June
30, 2010.
Loss from
Operations was approximately $7.8 million for the six months ended June
30, 2010 compared to a loss of approximately $0.6 million for the six months
ended June 30, 2009.
Other Expense,
net was approximately $7.0 million for the six months ended June 30, 2010
compared to approximately $6.4 million for the six months ended June 30, 2009.
The increase of $0.6 million was primarily due to the net loss on extinguishment
of debt of $4.8 million offset by the increase of the loss on the derivative
liability of $1.8 million.
Net Loss
was $14.2 million or $0.24 per share for the six months ended June 30,
2010 compared to $4.9 million or $0.11 per share for the six months ended June
30, 2009 resulting in a increased loss of $9.3 million. The primary reasons for
the net loss for the six months ended June 30, 2010 was the net loss on
extinguishment of debt of $4.8 million and $2.4 million of interest expense
recognized for that period.
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. The Company entered into various agreements to fund
short term capital needs.
On March
4, 2010, Epic entered into the Bridge Loan to meet short term working capital
needs with Castex, for an aggregate amount of $500,000. The Bridge
Loan bears interest at the rate of 10% per annum. All principal
outstanding on the Bridge Loan is payable at maturity, which is the earliest of
(i) three business days following written demand from Castex, (ii) June 1, 2010,
and (iii) the date on which Castex’s obligation to make additional loans to the
Company is terminated pursuant to a default, as that term is defined in the
Bridge Loan such earliest date, the Maturity Date. Interest is
payable on the date of any repayment of any loans and on the maturity
date.
On April
9, 2010, the Company entered into the Subscription Agreement with accredited
investors in connection with the Private Placement of 3,660,000 shares of the
Company’s Series A Preferred Stock (“Series A Preferred
Stock”). Under the Private Placement, the Company sold 3,160,000
Series A Preferred Stock in the Private Placement for $1.00 per
share. Also, pursuant to the Private Placement, the Company issued
500,000 shares of Series A Preferred Stock to Castex in exchange for the
forgiveness of the Bridge Loan of $500,000. Each share of Series A Preferred
Stock will be convertible into 14 shares of the Company’s Common Stock after
such time that the Company increases its authorized shares of Common Stock
sufficiently to permit such conversion by amending its Articles of
Incorporation.
On April
9, 2010, in connection with the Private Placement, the Company entered into a
Debenture Exchange Agreement with certain Holders whereby the Company issued
14,000,000 shares of its Common Stock to certain Holders in exchange for
forgiveness of an aggregate of $1,000,000 of principal of
Debentures.
14
On April
9, 2010, the Company entered into a Waiver and Amendment to Debentures with 98%
of the Holders and an Amendment to Securities Purchase Agreement with all of the
Holders. Pursuant to these agreements, the Company issued 147,094 shares of
Series A Preferred Stock to one Limited Holder and 3,940,678 shares of its
Common Stock to the other Holders in exchange for the consent to defer principal
payments and amend or waive certain covenants pertaining to the Debentures. The
Company agreed to redeem all of the Debentures held by the Holders that did not
agree to the Waiver and Amendment to Debentures and the Amendment to Securities
Purchase Agreement.
Operating
activities used cash of $5.4 million for the six months ended June 30, 2010
compared to providing cash of approximately $3.3 million for the six months
ended June 30, 2009. We had a net loss of $14.0 million for the six
months ended June 30, 2010 and a decrease in cash flow from changes in assets
and liabilities of approximately $4.1 million. During the six months ended June
30, 2010, we had non-cash expenses of $4.0 million impairment of intangible
assets, $4.8 million net loss on extinguishment of debt, $0.6 million of
non-cash interest expense, $0.9 million of amortization of debt discount and
debt issuance costs, $1.0 million of depreciation and amortization, $0.8 million
for the change in the fair value of the derivative liability, and $0.8 million
of non-cash stock based compensation expense. For the six months
ended June 30, 2009, we had a net loss of $4.9 million and an increase in cash
flow from changes in assets and liabilities of $2.3 million. In addition during
the six months ended June 30, 2009, we had $2.8 million of amortization of debt
discount and debt issuance costs, $1.9 million of depreciation and amortization
and $2.6 million loss of derivative liability.
For the
six months ended June 30, 2010, we used $0.2 million of cash flows for investing
activities for the acquisition of property and equipment. For the six months
ended June 30, 2009, we used $0.1 million of cash flows for investing activities
for the acquisition of property and equipment.
For the
six months ended June 30, 2010, financing activities provided $5.6 million of
cash flows. We raised $3.2 million from the preferred stock private placement,
$0.5 million in proceeds from debt and $2.4 million from proceeds on the sale of
accounts receivable. For the six months ended June 30, 2009, we used
cash of $4.6 million for financing activities for debt payments.
As of
June 30, 2010, we had working capital deficit of $4.0 million compared with the
working capital deficit of $9.5 million at December 31, 2009.
Critical Accounting
Policies
This
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements. The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts. On an ongoing basis, we evaluate our estimates, including
those related to bad debts, intangible assets, long-lived assets, income taxes,
and contingencies and litigation. We base our estimates on historical experience
and on various other assumptions and factors that we believe to be reasonable
under the circumstances. Based on our ongoing review, we make adjustments we
consider appropriate under the facts and circumstances. The accompanying
condensed unaudited consolidated financial statements are prepared using the
same critical accounting policies discussed in our 2009 Annual Report on Form
10-K.
Contractual
Commitments
There
have been no material changes to Epic’s contractual commitments during the
second quarter of 2010 (except as noted above). Please see Note 6 and
the Company’s Annual Report on Form 10-K for December 31, 2009 for a complete
discussion of the Company’s debt obligations.
Except
for the commitments arising from our operating leases arrangements, we have no
other off-balance sheet arrangements that are reasonably likely to have a
material effect on our financial statements.
Safety
Working
safely is a major objective at Epic. We believe this organization-wide objective
provides for a safer work environment for employees, reduces our costs and
enhances our reputation. Furthermore, striving to be a world-class leader in
safety provides a platform for all employees to understand and apply the resolve
necessary to be a high-performing organization. We measure our progress on
safety based on Recordable Incidence Rate (“RIR”) as defined by OSHA. For the
six month period ending June 30, 2010, the Company had no reportable
incidents. We continued to increase the number of training hours and
worked judiciously to reduce the Company’s RIR’s.
15
ITEM
4T. CONTROLS AND PROCEDURES
(a)
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 Rule 13a-15(e) of the Securities Exchange Act of 1934)
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, Ippolito and Kinney have concluded
that the Company’s disclosure control and procedures were effective
as of June 30, 2010.
(b)
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule
15d-15 under the Exchange Act that occurred during the quarter ended June 30,
2010 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
16
PART
II – OTHER INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In April
2010, Epic sold 3,660,000 Series A Preferred Stock without registration under
the Securities Act of 1933, as amended (the “Act”), or state securities laws, in
reliance on the exemptions provided by Section 4(2) of the Act and Regulation D
promulgated thereunder. Because the Series A Preferred Stock has not
been registered, such shares may not be offered or sold by the investors absent
registration or an applicable exemption from registration requirements, such as
the exemption afforded by Rule 144 under the Act.
In April
2010, Epic issued 147,094 shares of Series A Preferred Stock and 3,940,678
shares of Common Stock in exchange for deferring principal payments and amending
or waiving certain covenants under the Debentures. The Company issued the shares
of Series A Preferred Stock and the shares of Common Stock without registration
under the Act, or state securities laws, in reliance on the exemptions provided
by Section 4(2) of the Act and Regulation D promulgated
thereunder. Because the Series A Preferred Stock and Common Stock
have not been registered, such shares may not be offered or sold by the
investors absent registration or an applicable exemption from registration
requirements, such as the exemption afforded by Rule 144 under the
Act.
In April
2010, Epic issued 451,299 shares of Series A Preferred Stock and 30,300,182
shares of Common Stock in exchange for the cancellation 17,071,363 Series D
Warrants, 5,613,668 Series C Warrants and forgiveness of $1,000,000 of principal
of the Debentures. These shares were issued without registration under the Act,
or state securities laws, in reliance on the exemptions provided by Section 4(2)
of the Act and Regulation D promulgated thereunder. Pursuant to Rule
144(d)(3)(ii) of the Act, the holding period of the Series A Preferred Stock and
the Common Stock issued in exchange for the Series D Warrants, the Series C
Warrants, and the principal amount of the Debentures will tack back to the
original issue dates of the Series D Warrants, the Series C Warrants and the
Debentures and as a result such Series A Preferred Stock and Common Stock will
be issued without a restrictive legend and shall otherwise have no restrictions
on resale by the Holders. Holders of such Series A Preferred Stock
and Common Stock will therefore be permitted to resell such shares of Series A
Preferred Stock and Common Stock without restriction, and resales by such
holders of the Series A Preferred Stock and Common Stock will not be covered by
a registration statement filed by the Company.
ITEM
6. EXHIBITS
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
17
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
EPIC
ENERGY RESOURCES, INC.
|
||
(Registrant)
|
||
Date:
August 12, 2010
|
/s/
John S. Ippolito
|
|
Chief
Executive Officer, President and Principal
Executive
Officer
|
||
Date:
August 12, 2010
|
/s/
Michael Kinney
|
|
Chief Financial
Officer, Executive Vice
President
and Principal Accounting
Officer
|
18