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| EPCC.OB > SEC Filings for EPCC.OB > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
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.
Epic Energy Resources, Inc. ("Epic") was incorporated in 1989. Following its formation, Epic was relatively inactive until April 2006 when its management changed and it became involved in the oil and gas industry. Epic acquired certain producing oil and gas properties in December 2006 which were shut-in between January 2007 and August 2008. Epic acquired The Carnrite Group ("Carnrite") in August 2007 and Pearl Investment Company ("Pearl") in December 2007. Epic's revenues from Carnrite and Pearl are principally derived from consulting and engineering services to the oil, gas and energy industry. Carnrite's management consulting services provide content rich advice to keep companies engaged in the oil and gas sector competitive in the global market. Pearl provides engineering and consulting services focused on the design, build, operations, maintenance, and development of upstream oil and gas assets including associated gathering, compression and processing facilities.. In February 2008, Epic acquired Epic Integrated Services LLC ("EIS"), a provider of personnel training, documentation and data management to the oil, gas and energy industry. With respect to this discussion, the terms "the Company", "we," "us," and "our" refer to Epic Energy Resources, Inc. and our wholly-owned subsidiaries.
During 2007, Epic acquired two significant companies (Carnrite and Pearl) that have increased our annualized consulting revenues substantially. These companies generated pro forma annual revenues for 2007 of approximately $59.3 million. In early 2008, Epic acquired EIS which generated 2007 revenues of approximately $2.9 million. As a result, our operations are principally related to consulting and engineering services to the energy industry. We plan to strategically co-invest with our clients or take up to 100% working interest in surface infrastructure projects where we are contracted to design, build and operate gathering, compression and/or processing facilities.
During 2007, Epic raised over $28.9 million in debt and equity capital to fund our acquisitions and operations. In addition, we issued over 4.7 million shares of our common stock in conjunction with these acquisitions.
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 2007 Annual Report on Form 10-KSB.
Epic had minimal operations until the acquisition of Carnrite in August 2007 and Pearl in December 2007. Epic's historical operating results and period to period comparisons are not significant until 2007. All increases in the Company's revenues and expenses between 2008 and 2007 are associated with the acquisitions of Carnrite, Pearl and EIS. The results of operations for the nine months ended September 30, 2008 include the historical results of EIS from January 1, 2008.
Expenses which are directly related to oil and gas production are charged to lease operating expenses. All other expenses (except depletion, accretion and impairment), whether they relate to consulting services or oil and gas exploration/development, are recorded as general and administrative expenses.
The Company grew significantly in 2007 through the acquisitions of Carnrite and Pearl. In February 2008, Epic acquired EIS and we expect to continue an aggressive acquisition plan in the foreseeable future. We plan to strategically continue our growth in geographic regions where our engineering expertise is our strength, such regions including the Rocky Mountains, Texas, Oklahoma and Kansas. As we build our infrastructure, we expect to expand our service region throughout the United States and into foreign countries that are seeking our expertise.
As of September 30, 2008, Epic's potential backlog for consulting services to be performed in the future was approximately $28.3 million. This compares with a combined backlog of approximately $45.8 million as of June 30, 2008. Our backlog does not include anticipated contracts for 2009 since our clients are currently preparing their 2009 budgets. This backlog amount could change by macro economic market activity and customer demand changes.
Three Months ended September 30, 2008 compared with Three Months ended September 30,2007
Revenues were approximately $21.3 million for the quarter ended September 30, 2008 compared to approximately $1.6 million for the quarter ended September 30, 2007. The increase of $19.7 million was primarily the result of the acquisitions of Pearl and EIS.
Operating Expenses were approximately $20.8 million for the quarter ended September 30, 2008 compared to approximately $1.4 million for the quarter ended September 30, 2007 resulting in an increase of approximately of $19.4 million. This increase was primarily the result of the acquisitions of Pearl and EIS.
Income from Operations was approximately $0.5 million for the quarter ended September 30, 2008 compared to $0.2 million for the quarter ended September 30, 2007.
Other Expense, net was approximately $3.8 million for the quarter ended September 30, 2008 compared to approximately $0.2 million for the quarter ended September 30, 2007. The increase of $3.6 million was primarily due to an accrual for liquidating damages of $2.2 million and $1.6 million interest expense and debt discount amortization associated with the acquisition of Pearl.
Net Loss was $3.3 million or $0.08 per share for the quarter ended September 30, 2008 compared to $43,333 or $0.00 per share for the quarter ended September 30, 2007 resulting in an increased loss of $3.3 million. The primary reasons for the net loss for the three months ended September 30, 2008 was the accrual for liquidating damages of $2.2 million and $1.6 million of interest expense recognized during that period.
Nine Months ended September 30, 2008 compared with Nine Months ended September 30, 2007
Revenues were approximately $55.4 million for the nine months ended September 30, 2008 compared to approximately $1.7 million for the nine months ended September 30, 2007. The increase of $53.7 million was primarily the result of the acquisitions of Carnrite, Pearl and EIS.
Operating Expenses were approximately $56.9 million for the nine months ended September 30, 2008 compared to approximately $3.7 million for the nine months ended September 30, 2007. This increase of $53.2 million was primarily the result of the acquisitions of Carnrite, Pearl and EIS.
Loss from Operations was approximately $1.5 million for the nine months ended September 30, 2008 compared to a loss from operations of approximately $2.0 million for the nine months ended September 30, 2007. The decrease in the loss from operation of $0.5 million was related to the impairment of oil and gas properties of $1.3 million recorded in the nine months ended September 30, 2007.
Other Expense, net was approximately $6.8 million for the nine months ended September 30, 2008 compared to approximately $0.3 million for the nine months ended September 30, 2007. The increase of $6.5 million was primarily due to an accrual for liquidating damages of $2.2 million and $4.7 million of interest expense and debt discount amortization associated with the acquisition of Pearl.
Net Loss was $8.4 million or $0.19 per share for the nine months ended September 30, 2008 compared to $2.3 million or $0.06 per share for the nine months ended September 30, 2007 resulting in an increased loss of $6.1 million. The primary reasons for the net loss for the nine months ended September 30, 2008 was the accrual for liquidating damages of $2.2 million $4.7 million of interest expense recognized for that period.
Between October 2006 and April 2007 Epic raised $1,414,700, net of commissions, from the sale of 1,455,100 shares of its common stock, plus 491,500 Series A warrants and 963,600 Series B warrants, to private investors. The Series A warrants expired on December 31, 2007. Each Series B Warrant entitles the holder to purchase one share of Epic's common stock at a price of $2.50 per share at any time prior to October 31, 2009.
On December 5, 2007 Epic sold 4,406,334 shares of its common stock to a group of private investors for gross proceeds of $6,609,501, or $1.50 per share. The investors also received warrants which entitle the holders to purchase up to 4,406,334 shares of the Company's common stock. The warrants are exercisable at a price of $1.50 per share and expire on December 5, 2012.
On December 31, 2007 Epic sold an additional 1,023,001 shares of its common stock to a group of private investors for gross proceeds of $1,534,502 or $1.50 per share. The investors also received warrants which entitle the holders to purchase up to 1,023,001 shares of Epic's common stock. The warrants are exercisable at a price of $1.50 per share and expire on December 5, 2012.
On December 5, 2007 Epic issued $20,250,000 of secured debentures to another group of private investors. The notes bear interest of 10% per year. The notes are due and payable on December 5, 2012 and are secured by liens on all of the Company's assets. The purchasers of the notes also received Series D warrants which entitle the holders to purchase up to 15,954,545 shares of Epic's common stock. The warrants are exercisable at a price of $1.65 per share and expire on December 5, 2012. Interest on the debentures is payable quarterly with the first interest payment due on January 1, 2008. Beginning December 1, 2008 Epic is required to make quarterly payments of $1,265,625 toward the principal of the debentures in cash or in kind.
On February 20, 2008, with an effective date of January 1, 2008, Epic acquired Epic Integrated Solutions, LLC ("EIS"), an unaffiliated entity, for cash and 1,000,000 shares of its restricted common stock. At closing, Epic paid $600,000 and issued a note payable for $1,400,000 which will be paid to the prior owners of EIS in periodic installments during 2008 and
2009. The 1,000,000 shares will vest annually over a three year period. As of September 30, 2008, 333,333 of these shares have been distributed to the previous owner's of EIS. Also, additional acquisition costs of approximately $267,000 were incurred in the second quarter of 2008.
Operating activities provided cash of $3.4 million for the nine months ended September 30, 2008 compared to approximately $0.3 million of cash used in operations for the nine months ended September 30, 2007. We had a net loss of $8.4 million for the nine months ended September 30, 2008 which was offset by changes in assets and liabilities of approximately $4.9 million. In addition during the nine months ended September 30, 2008, we had approximately $2.6 million of amortization of debt discount and debt issuance costs, $2.0 million of depreciation, amortization and depletion, $0.9 million of non-cash stock based compensation expense, and $661,000 expense for bad debts. For the nine months ended September 30, 2007, we had a net loss of $2.3 million which was offset by $1.3 million in impairment of oil and gas properties, changes in assets and liabilities of approximately $56,000 and other non-cash items of approximately $0.6 million.
For the nine months ended September 30, 2008, we had investing activities that provided cash of $0.9 million primarily as a result of the decrease in restricted cash of $2.5 million offset by acquisition of property and equipment of $1.4 million. For the nine months ended September 30, 2007, we had investing activities that provided cash of approximately $24,000 primarily due to $48,000 net cash received in the Carnrite acquisition off set by $23,000 used for investment in a joint venture.
For the nine months ended September 30, 2008, we used $4.3 million of cash flows for financing activities related to a decrease in bank overdrafts of $3.4 million and debt payments of $0.8 million. For the nine months ended September 30, 2007, we had cash provided by financing activities of approximately $0.4 million primarily due to proceeds of $0.5 million from the issuance of common stock.
As of September 30, 2008, we had working capital deficit of $2.0 million compared with working capital of $7.6 million at December 31, 2007.
At September 30, 2008, average collection of accounts receivable was approximately 86 days. Excluding one customer the average collection of accounts receivable was approximately 69 days. The Company is closely monitoring this customer who primarily operates in the Power River Basin, as they are having liquidity issues. The Company is communicating with this customer on a weekly basis to ensure our receivables are protected.
As a result of the acquisition of Carnrite, Pearl and EIS, Epic believes that cash provided by its operations will satisfy its future capital and debt service requirements.
There have been no material changes to Epic's contractual commitments during the third quarter of 2008. Please see Note 8 and the Company's Annual Report on Form 10-KSB for December 31, 2007 for a complete discussion of the Company's lease 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.
Working safely is a major objective at Epic. We believe this organization-wide objective provides for a safer work environment for employees, reduces our costs and enhances our reputation. Furthermore, striving to be a world-class leader in safety provides a platform for all employees to understand and apply the resolve necessary to be a high-performing organization. We measure our progress on safety based on Recordable Incidence Rate ("RIR") as defined by OSHA. For the nine month period ending September 30, 2008, we continued to increase the number of training hours and worked judiciously to reduce the RIR's.
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