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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

  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: 001-38770

EPSILON ENERGY LTD.

(Exact name of registrant as specified in its charter)

Alberta, Canada

98-1476367

(State or other jurisdiction of incorporation or organization)

(I.R.S Employer Identification No.)

500 Dallas Street, Suite 1250

Houston, Texas 77002

(281) 670-0002

(Address of principal executive offices including zip code and

telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Shares, no par value

EPSN

NASDAQ Global Market

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

As of May 8, 2024, there were 21,921,850 Common Shares outstanding.

Table of Contents

Contents

    

FORWARD-LOOKING STATEMENTS

4

PART I-FINANCIAL INFORMATION

5

ITEM 1. FINANCIAL STATEMENTS

5

Unaudited Condensed Consolidated Balance Sheets

5

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

5

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

7

Unaudited Condensed Consolidated Statements of Cash Flows

8

Notes to the Unaudited Condensed Consolidated Financial Statements

1.

Description of Business

9

2.

Basis of Preparation

9

Interim Financial Statements

9

Principles of Consolidation

9

Use of Estimates

9

Recently Issued Accounting Standards

9

3.

Cash, Cash Equivalents, and Restricted Cash

11

4.

Short Term Investments

11

5.

Property and Equipment

12

Property Impairment

12

6.

Revolving Line of Credit

12

7.

Shareholders’ Equity

13

8.

Revenue Recognition

16

9.

Income Taxes

17

10.

Commitments and Contingencies

17

Litigation

18

11.

Leases

18

12.

Net Income Per Share

19

13.

Operating Segments

20

14.

Commodity Risk Management Activities

22

Commodity Price Risks

22

Commodity Derivative Contracts

22

15.

Asset Retirement Obligations

23

16.

Fair Value Measurements

23

17.

Current Expected Credit Loss

24

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

25

Overview

25

Business Strategy

25

Operational Highlights

26

Non-GAAP Financial Measures-Adjusted EBITDA

26

Net Operating Revenues

28

Operating Costs

29

Depletion, Depreciation, Amortization and Accretion

29

General and Administrative

30

Loss on Derivative Contracts

30

Capital Resources and Liquidity

31

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report constitute forward-looking statements. The use of any of the words ‘‘anticipate,’’ ‘‘continue,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘may,’’ ‘‘will,’’ ‘‘project,’’ ‘‘should,’’ ‘‘believe,’’ and similar expressions and statements relating to matters that are not historical facts constitute ‘‘forward looking information’’ within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Such forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this report should not be unduly relied upon. These statements are made only as of the date of this report. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to natural gas and oil production rates, commodity prices for crude oil or natural gas, supply and demand for natural gas and oil; the estimated quantity of natural gas and oil reserves, including reserve life; future development and production costs, and statements expressing general views about future operating results — are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2023, and those described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider carefully the statements under Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2023. Our Annual Report on Form 10-K for the year ended December 31, 2023 is available on our website at www.epsilonenergyltd.com.

4

PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Balance Sheets

    

March 31, 

    

December 31, 

2024

2023

ASSETS

Current assets

Cash and cash equivalents

$

2,308,633

$

13,403,628

Accounts receivable

5,061,734

6,015,448

Short term investments

12,238,177

18,775,106

Fair value of derivatives

1,347,512

1,219,025

Prepaid income taxes

1,020,702

952,301

Other current assets

619,542

763,288

Total current assets

22,596,300

41,128,796

Non-current assets

Property and equipment:

Oil and gas properties, successful efforts method

Proved properties

180,452,860

160,263,511

Unproved properties

28,593,071

25,504,873

Accumulated depletion, depreciation, amortization and impairment

(115,782,946)

(113,708,210)

Total oil and gas properties, net

93,262,985

72,060,174

Gathering system

42,757,299

42,738,273

Accumulated depletion, depreciation, amortization and impairment

(35,788,907)

(35,539,996)

Total gathering system, net

6,968,392

7,198,277

Land

637,764

637,764

Buildings and other property and equipment, net

287,524

291,807

Total property and equipment, net

101,156,665

80,188,022

Other assets:

Operating lease right-of-use assets, long term

417,268

441,987

Restricted cash

900,000

470,000

Prepaid drilling costs

1,813,808

Total non-current assets

102,473,933

82,913,817

Total assets

$

125,070,233

$

124,042,613

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Accounts payable trade

$

3,215,137

$

3,236,871

Gathering fees payable

667,014

1,136,237

Royalties payable

1,201,478

1,422,898

Accrued capital expenditures

2,706,951

696,761

Accrued compensation

212,892

636,295

Other accrued liabilities

732,593

561,537

Fair value of derivatives

836,268

118,770

Operating lease liabilities

95,170

86,473

Total current liabilities

9,667,503

7,895,842

Non-current liabilities

Asset retirement obligations

3,562,486

3,502,952

Deferred income taxes

11,530,950

11,553,943

Operating lease liabilities, long term

446,226

476,911

Total non-current liabilities

15,539,662

15,533,806

Total liabilities

25,207,165

23,429,648

Commitments and contingencies (Note 10)

Shareholders' equity

Preferred shares, no par value, unlimited shares authorized, none issued or outstanding

Common shares, no par value, unlimited shares authorized and 21,913,202 shares issued and outstanding at March 31, 2024 and 22,222,722 issued and 22,151,848 shares outstanding at December 31, 2023

116,708,531

118,272,565

Treasury shares, at cost, 0 at March 31, 2024 and 70,874 at December 31, 2023

(360,326)

Additional paid-in capital

11,196,060

10,874,491

Accumulated deficit

(37,809,555)

(37,946,042)

Accumulated other comprehensive income

9,768,032

9,772,277

Total shareholders' equity

99,863,068

100,612,965

Total liabilities and shareholders' equity

$

125,070,233

$

124,042,613

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

5

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

Three months ended March 31, 

    

2024

    

2023

Revenues from contracts with customers:

Gas, oil, NGL, and condensate revenue

$

6,051,045

$

6,969,581

Gas gathering and compression revenue

1,935,698

2,386,695

Total revenue

7,986,743

9,356,276

Operating costs and expenses:

Lease operating expenses

1,768,462

1,404,279

Gathering system operating expenses

552,570

651,341

Depletion, depreciation, amortization, and accretion

2,380,426

1,773,006

General and administrative expenses:

Stock based compensation expense

321,569

179,748

Other general and administrative expenses

1,559,023

2,023,773

Total operating costs and expenses

6,582,050

6,032,147

Operating income

1,404,693

3,324,129

Other income (expense):

Interest income

266,272

490,762

Interest expense

(8,760)

(28,437)

(Loss) gain on derivative contracts

(100,726)

1,068,660

Other income (expense), net

(533)

1,635

Other income, net

156,253

1,532,620

Net income before income tax expense

1,560,946

4,856,749

Income tax expense

54,050

1,326,922

NET INCOME

$

1,506,896

$

3,529,827

Currency translation adjustments

364

(2,600)

Unrealized loss on securities

(4,609)

NET COMPREHENSIVE INCOME

$

1,502,651

$

3,527,227

Net income per share, basic

$

0.07

$

0.15

Net income per share, diluted

$

0.07

$

0.15

Weighted average number of shares outstanding, basic

21,994,207

22,990,893

Weighted average number of shares outstanding, diluted

21,994,207

23,027,684

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

6

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

    

  

  

  

  

  

Accumulated

  

  

Other

Total

Common Shares Issued

Treasury Shares

Additional

Comprehensive

Accumulated

Shareholders'

Shares

Amount

Shares

Amount

paid-in Capital

Income

Deficit

Equity

Balance at January 1, 2024

22,222,722

$

118,272,565

(70,874)

$

(360,326)

$

10,874,491

$

9,772,277

$

(37,946,042)

$

100,612,965

Net income

1,506,896

1,506,896

Dividends paid

(1,370,409)

(1,370,409)

Stock-based compensation expense

321,569

321,569

Buyback of common shares

(248,700)

(1,203,708)

(1,203,708)

Retirement of treasury shares

(319,574)

(1,564,034)

319,574

1,564,034

Vesting of shares of restricted stock

10,054

Other comprehensive loss

(4,245)

(4,245)

Balance at March 31, 2024

21,913,202

$

116,708,531

$

$

11,196,060

$

9,768,032

$

(37,809,555)

$

99,863,068

    

  

  

  

  

  

Accumulated

  

  

Other

Total

Common Shares Issued

Treasury Shares

Additional

Comprehensive

Accumulated

Shareholders'

Shares

Amount

Shares

Amount

paid-in Capital

Income

Deficit

Equity

Balance at January 1, 2023

23,117,144

$

123,904,965

$

$

9,856,229

$

9,774,551

$

(39,290,540)

$

104,245,205

Net income

3,529,827

3,529,827

Dividends paid

(1,412,455)

(1,412,455)

Stock-based compensation expense

179,748

179,748

Buyback of common shares

(237,920)

(1,367,425)

(1,367,425)

Retirement of treasury shares

(190,700)

(1,115,306)

190,700

1,115,306

Other comprehensive income

(2,600)

(2,600)

Balance at March 31, 2023

22,926,444

$

122,789,659

(47,220)

$

(252,119)

$

10,035,977

$

9,771,951

$

(37,173,168)

$

105,172,300

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

7

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Cash Flows

Three months ended March 31, 

    

2024

    

2023

Cash flows from operating activities:

Net income

$

1,506,896

$

3,529,827

Adjustments to reconcile net income to net cash provided by operating activities:

Depletion, depreciation, amortization, and accretion

2,380,426

1,773,006

Accretion of discount on available for sale securities

(216,180)

Loss (gain) on derivative contracts

100,726

(1,068,660)

Settlement received on derivative contracts

488,285

363,300

Settlement of asset retirement obligation

(1,653)

Stock-based compensation expense

321,569

179,748

Deferred income tax expense (benefit)

(22,993)

(12,108)

Changes in assets and liabilities:

Accounts receivable

953,714

2,396,066

Prepaid income taxes

(68,401)

Other assets and liabilities

146,477

143,646

Accounts payable, royalties payable and other accrued liabilities

(1,897,438)

(1,062,898)

Income taxes payable

1,336,225

Net cash provided by operating activities

3,691,428

7,578,152

Cash flows from investing activities:

Additions to unproved oil and gas properties

(3,088,198)

(106,069)

Additions to proved oil and gas properties

(17,226,449)

(621,132)

Additions to gathering system properties

(22,650)

(12,423)

Additions to land, buildings and property and equipment

(7,681)

(42,703)

Purchases of short term investments - available for sale

(4,045,785)

(30,138,743)

Proceeds from sales and maturities of short term investments

10,794,285

Prepaid drilling costs

1,813,808

Net cash used in investing activities

(11,782,670)

(30,921,070)

Cash flows from financing activities:

Buyback of common shares

(1,203,708)

(1,367,425)

Dividends paid

(1,370,409)

(1,412,455)

Net cash used in financing activities

(2,574,117)

(2,779,880)

Effect of currency rates on cash, cash equivalents, and restricted cash

364

(2,600)

(Decrease) increase in cash, cash equivalents, and restricted cash

(10,664,995)

(26,125,398)

Cash, cash equivalents, and restricted cash, beginning of period

13,873,628

45,806,947

Cash, cash equivalents, and restricted cash, end of period

$

3,208,633

$

19,681,549

Supplemental cash flow disclosures:

Interest paid

$

$

17,216

Non-cash investing activities:

Change in proved properties accrued in accounts payable and accrued liabilities

$

2,946,528

$

375,242

Change in gathering system accrued in accounts payable and accrued liabilities

$

(3,624)

$

9,201

Asset retirement obligation asset additions and adjustments

$

16,372

$

736

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

8

Table of Contents

Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Description of Business

Epsilon Energy Ltd. (the “Company” or “Epsilon” or “we”) was incorporated under the laws of the Province of Alberta, Canada on March 14, 2005, pursuant to the ABCA. Epsilon is a North American on-shore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. On February 14, 2019, Epsilon’s registration statement on Form 10 was declared effective by the United States Securities and Exchange Commission and on February 19, 2019, we began trading in the United States on the NASDAQ Global Market under the trading symbol “EPSN.”

2.    Basis of Preparation

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the appropriate rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments which are, in the opinion of management, necessary for a fair statement of the financial position and results of operations for the interim periods presented have been included. The interim financial information and notes hereto should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2023. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year.

Principles of Consolidation

The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Epsilon Energy USA, Inc. and its wholly owned subsidiaries, Epsilon Midstream, LLC, Dewey Energy GP, LLC, Dewey Energy Holdings, LLC, Epsilon Operating, LLC, and Altolisa Holdings, LLC. With regard to the gathering system, in which Epsilon owns an undivided interest in the asset, proportionate consolidation accounting is used. All inter-company transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. 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 period. The most significant estimates pertain to proved natural gas and oil reserves and related cash flow estimates used in impairment tests of natural gas and oil, and gathering system properties, asset retirement obligations, accrued natural gas and oil revenues and operating expenses, accrued gathering system revenues and operating expenses, as well as the valuation of commodity derivative instruments. Actual results could differ from those estimates.

Recently Issued Accounting Standards

The Company, an emerging growth company (“EGC”), has elected to take advantage of the benefits of the extended transition period provided for in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards which allows the Company to defer adoption of certain accounting standards until those standards would otherwise apply to private companies.

In June 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance removes all recognition thresholds and requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the

9

Table of Contents

Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

Company expects to collect over the instrument’s contractual life. Epsilon adopted ASU 2016-13 as of January 1, 2023. There was no impact from the adoption of this ASU.

In 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which, for a limited period of time, adds ASC 848 to the Codification providing entities with certain practical expedients and exceptions from applying modification accounting if certain criteria are met. The amendments are designed to reduce operational challenges that entities will face in applying modification accounting to all contracts that will be revised due to reference rate reform. The guidance in ASC 848 was triggered by the pending discontinuation of certain benchmark reference rates and, in some cases, their replacement by new rates that are more observable or transaction-based and, therefore, less susceptible to manipulation, than certain interest-rate benchmark reference rates commonly used today, including the London Interbank Offered Rate (LIBOR). This process of reference rate reform will require entities to modify certain contracts by removing the discontinued rates and including new rates. Epsilon adopted ASU 2020-04 as of January 1, 2023. There was no impact from the adoption of this ASU.

In July 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-03 to amend various SEC paragraphs in the Accounting Standards Codification (“ASC”) to primarily reflect the issuance of SEC Staff Accounting Bulletin No. 120. ASU No. 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120 (“SAB 120”), SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force (“EITF”) Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” ASU 2023-03 amends the ASC for SEC updates pursuant to SEC Staff Accounting Bulletin No. 120; SEC Staff Announcement at the March 24, 2022 EITF Meeting; and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 – General Revision of Regulation S-X; Income or Loss Applicable to Common Stock. SAB 120 provides guidance on the measurement and disclosure of share-based awards shortly before announcing material nonpublic information. These updates were immediately effective and did not have any impact on our condensed consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, to amend certain disclosure and presentation requirements.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU required disclosure of incremental segment information, primarily through enhanced disclosures about significant segment expenses and amounts for each reportable segment on an annual and interim basis. This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods with fiscal years beginning after December 15, 2024. The Company is currently assessing the potential effects of the standard.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to disclose disaggregated information about a reporting entity’s effective tax rate reconciliation, using both percentages and reporting currency amounts for specific standardized categories, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently assessing the potential effects of this standard.

10

Table of Contents

Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

3. Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash on hand and short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Restricted cash consists of amounts deposited to back bonds or letters of credit for potential well liabilities. The Company presents restricted cash with cash and cash equivalents in the Consolidated Statements of Cash Flows.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the Consolidated Balance Sheets to the total of the amounts in the Consolidated Statements of Cash Flows as of March 31, 2024 and December, 31 2023:

    

March 31, 

    

December 31,

2024

2023

Cash and cash equivalents

$

2,308,633

$

13,403,628

Restricted cash included in other assets

900,000

470,000

Cash, cash equivalents, and restricted cash in the statement of cash flows

$

3,208,633

$

13,873,628

During the three months ended March 31, 2024, the Company was in the process of transitioning financial institutions for its Letters of Credit (“LOCs”) tied to various bonds associated with Pennsylvania and New York operatorship. The transition caused a temporary increase in restricted cash until the new LOCs are deemed effective and until the previous LOCs can be cancelled.  

4. Short Term Investments

Short term investments are highly liquid investments with original maturities between three and twelve months. The Company’s short term investments consist of US Treasury Bills. These investments are classified as available-for-sale. Available-for-sale short term investments are reported at fair value in the Consolidated Balance Sheets. Unrealized gains and losses are excluded from earnings and are reported in accumulated other comprehensive income in the Consolidated Statements of Operations and Comprehensive Income.

The following table summarizes the available-for-sale short term investments as of March 31, 2024 and December 31, 2023.

    

March 31, 2024

    

December 31, 2023

Amortized

Unrealized

Fair

Amortized

Unrealized

Fair 

    

Cost

    

Losses

    

Value

    

Cost

    

Gains

    

Value 

U.S. Treasury Bills

$

12,241,187

$

(3,010)

$

12,238,177

$

18,773,508

$

1,598

$

18,775,106

During the three months ended March 31, 2024, the Company sold securities with a carrying amount of $7,003,123 for total proceeds of $7,159,285. The realized gains on these sales were $156,162. An additional $3,635,000 of securities reached maturity with total realized gains of $135,034. The realized gains are included in other income in the consolidated Statements of Operations and Comprehensive Income.

11

Table of Contents

Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

5.  Property and Equipment

The following table summarizes the Company’s property and equipment as of March 31, 2024 and December 31, 2023:

    

March 31, 

    

December 31, 

2024

2023

Property and equipment:

Oil and gas properties, successful efforts method

Proved properties

$

180,452,860

$

160,263,511

Unproved properties

28,593,071

25,504,873

Accumulated depletion, depreciation, amortization and impairment

(115,782,946)

(113,708,210)

Total oil and gas properties, net

93,262,985

72,060,174

Gathering system

42,757,299

42,738,273

Accumulated depletion, depreciation, amortization and impairment

(35,788,907)

(35,539,996)

Total gathering system, net

6,968,392

7,198,277

Land

637,764

637,764

Buildings and other property and equipment, net

287,524

291,807

Total property and equipment, net

$

101,156,665

$

80,188,022

Asset Acquisitions

During the three months ended March 31, 2024, Epsilon acquired assets that included the following:

a 25% working interest in three producing wells located in Ector County, Texas.
a 25% working interest in 3,246 gross undeveloped acres in Ector County, Texas.
total consideration paid of $14.8 million consisting of
(i)$12.1 million for the producing wells and
(ii)$2.7 million for the undeveloped acreage.

Management determined that substantially all the fair value of the assets acquired was concentrated in a group of similar identifiable assets. Based on this determination, the acquisition was accounted for as an asset acquisition. There were no acquisitions during the three months ended March 31, 2023.

Property Impairment

We perform a quantitative impairment test whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, over proved properties using the published NYMEX forward prices, basis differentials, timing, methods and other assumptions consistent with historical periods. When indicators of impairment are present, GAAP requires that the Company first compare expected future undiscounted cash flows by asset group to their respective carrying values. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the natural gas properties to their estimated fair values is required. Additionally, if an exploratory well is determined not to have found proved reserves, the costs incurred, net of any salvage value, should be charged to expense.

During the three months ended March 31, 2024 and 2023, no impairment was recorded.

6. Revolving Line of Credit

The Company closed a senior secured reserve based revolving credit facility on June 28, 2023, with Frost Bank as issuing bank and sole lender. The current commitment and borrowing base is $35 million, supported by the Company’s upstream assets in Pennsylvania and subject to semi-annual redeterminations with a maturity date of the earlier of June 28, 2027 or the date that the commitments are terminated. Interest will be charged at the Daily Simple SOFR rate plus a margin

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Table of Contents

Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

of 3.25%. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary (Borrower) and guaranteed by the Company and the other wholly owned subsidiaries. There are currently no borrowings under the facility.

Under the terms of the facility, the Company must adhere to the following financial covenants:

Current ratio of 1.0 to 1.0 (current assets / current liabilities)
Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and non-cash amounts)

Additionally, if the Leverage ratio is greater than 1.0 to 1.0, or the borrowing base utilization is greater than 50%, the Company is required to hedge 50% of the anticipated production from PDP reserves for a rolling 24 month period.

We were in compliance with the financial covenants of the agreement as of March 31, 2024.

    

Balance at

    

Balance at

    

    

March 31, 

    

December 31, 

Current

    

2024

2023

    

Borrowing Base

    

Interest Rate

Revolving line of credit

$

$

$

35,000,000

SOFR + 3.25%

7. Shareholders’ Equity

(a)Authorized shares

The Company is authorized to issue an unlimited number of Common Shares with no par value and an unlimited number of Preferred Shares with no par value.

(b)Purchases of Equity Shares

Normal Course Issuer Bid

On March 20, 2024, the Board of Directors authorized a new share repurchase program of up to 2,191,320 common shares, representing 10% of the outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $12.0 million. The program is pursuant to a normal course issuer bid and will be conducted in accordance with Rule 10b-18 under the Exchange Act. The program commenced on March 27, 2024 and will end on March 26, 2025, unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination.

During the three months ended March 31, 2024, no shares have been repurchased under the new program.

The previous share repurchase program commenced on March 27, 2023 and ended on March 26, 2024. During the year ended December 31, 2023, we repurchased 968,149 common shares at an average price of $5.08 per share (excluding commissions) under the previous plan.

During the three months ended March 31, 2024, we repurchased 248,700 shares at a price of $4.82 per share (excluding commissions) under the previous plan.  

13

Table of Contents

Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

The following table contains activity relating to our acquisition of equity securities during the three months ended March 31, 2024:

    

Maximum number

of shares

Total number

Average price

remaining to be

of shares

paid per

purchased under

    

purchased

share

    

the program

Beginning of normal-course issuer bid, March 27, 2023 (1)

1,324,495

January 2024

248,700

$

4.82

Total as of March 31, 2024

248,700

$

4.82

1,075,795

(1)Epsilon repurchased these shares under its 2023-2024 share repurchase program that commenced on March 27, 2023 and terminated on March 26, 2024, as described above.

(c)Equity Incentive Plan

Epsilon’s board of directors (the “Board”) adopted the 2020 Equity Incentive Plan (the “2020 Plan”) on July 22, 2020 and  Epsilon’s shareholders approved the 2020 Plan at Epsilon’s 2020 Annual General and Special Meeting of Shareholders, which occurred on September 1, 2020 (the “Meeting”).

The 2020 Plan provides for incentive compensation in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and units, other stock-based awards and cash-based awards. Under the 2020 Plan, Epsilon will be authorized to issue up to 2,000,000 Common Shares.

Restricted Stock Awards

For the three months ended March 31, 2024, 63,980 restricted stock units with a weighted average price at the grant date of $5.08 were awarded to the Company’s board of directors. For the year ended December 31, 2023, 358,546 restricted stock units with a weighted average price at the grant date of $5.42 were awarded to the Company’s management, employees, and board of directors. These units vest over a three-year period, with an equal number of common shares being issued per period on the anniversary of the award resolution. The vesting of the units ( and corresponding issuance of shares) is contingent on the individuals’ continued employment or service. The Company determined the fair value of the granted restricted stock units based on the market price of the common shares of the Company on the date of grant.

The following table summarizes restricted stock unit activity for the three months ended March 31, 2024, and the year ended December 31, 2023:

Three months ended

Year ended

March 31, 2024

December 31, 2023

Number of

Weighted

Number of

Weighted

Restricted

Average

Restricted

Average

Shares

Remaining Life

Shares

Remaining Life

    

Outstanding

    

(years)

    

Outstanding

    

(years)

Balance non-vested Restricted Stock at beginning of period

491,536

1.74

298,210

1.74

Granted

63,980

1.87

358,546

1.90

Vested

(10,064)

(165,220)

Balance non-vested Restricted Stock at end of period

545,452

1.53

491,536

1.74

Stock compensation expense for the granted restricted stock units is recognized over the vesting period. Stock compensation expense recognized during the three months ended March 31, 2024 and 2023 was $321,569 and $165,064, respectively.

At March 31, 2024, the Company had unrecognized stock-based compensation related to the restricted stock units of $2,655,308 to be recognized over a weighted average period of 1.33 years (at December 31, 2023: $2,651,858 over 1.42 years).

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Table of Contents

Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

Performance Share Unit Awards (“PSU”)

For the three months ended March 31, 2024, there were no outstanding PSUs . For the year ended December 31, 2023, a total of 15,833 common shares vested and were issued.

The following table summarizes PSUs for the three months ended March 31, 2024 and the year ended December 31, 2023:

Three months ended

Year ended

March 31, 2024

December 31, 2023

Number of

Weighted

Number of

Weighted

Performance

Average

Performance

Average

Shares

Remaining Life

Shares

Remaining Life

    

Outstanding

    

(years)

    

Outstanding

    

(years)

Balance non-vested PSUs at beginning of period

15,833

1.00

Vested

(15,833)

Balance non-vested PSUs at end of period

Stock compensation expense for the granted PSUs is recognized over the vesting period. Stock compensation expense recognized during the three months ended March 31, 2024 and 2023 related to PSUs was $0 and $14,684, respectively.

At March 31, 2024 and December 31, 2023, the Company had no unrecognized stock-based compensation related to PSUs.

Stock Options

As of March 31, 2024, the Company had no outstanding stock options. During the three months ended March 31, 2024 and the year ended December 31, 2023, the Company awarded no stock options.

The following table summarizes stock option activity for the three months ended March 31, 2024 and the year ended December 31, 2023:

Three months ended

Year ended

March 31, 2024

December 31, 2023

Weighted

Weighted

Number of

Average

Number of

Average

Options

Exercise

Options

Exercise

Exercise price in US$

    

Outstanding

    

Price

    

Outstanding

    

Price (1)

Balance at beginning of period

57,500

$

5.03

70,000

$

5.03

Exercised

$

(12,500)

$

5.03

Expired