Table of Contents 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 June 30, 2023 ☐ 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 ...

```markdown [PART I - FINANCIAL INFORMATION](index=5&type=section&id=PART%20I-FINANCIAL%20INFORMATION) [Financial Statements](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) The unaudited condensed consolidated financial statements for Q1 2023 detail total assets, liabilities, revenue, net income, and key financial activities [Unaudited Condensed Consolidated Balance Sheets](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Total assets reached **$124.8 million** as of March 31, 2023, reflecting a shift from cash to **$30.1 million** in short-term investments Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Items | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $19,110,225 | $45,236,584 | | Short term investments | $30,138,743 | $— | | Total current assets | $56,478,469 | $55,463,691 | | Total property and equipment, net | $67,242,771 | $67,828,189 | | **Total assets** | **$124,824,577** | **$123,862,243** | | **Liabilities & Equity** | | | | Total current liabilities | $5,704,539 | $6,219,407 | | Total liabilities | $19,652,277 | $19,617,038 | | Total shareholders' equity | $105,172,300 | $104,245,205 | | **Total liabilities and shareholders' equity** | **$124,824,577** | **$123,862,243** | [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Loss)) Q1 2023 revenues decreased to **$9.4 million** due to lower natural gas prices, resulting in **$3.5 million** net income despite a **$1.1 million** derivative gain Consolidated Statements of Operations Highlights (Unaudited) | Financial Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Total revenue | $9,356,276 | $13,600,098 | | Operating income | $3,324,129 | $8,965,194 | | Gain (loss) on derivative contracts | $1,068,660 | $(971,904) | | **Net income** | **$3,529,827** | **$5,805,888** | | Net income per share, basic | $0.15 | $0.25 | | Net income per share, diluted | $0.15 | $0.24 | [Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Shareholders' equity increased to **$105.2 million** in Q1 2023, driven by **$3.5 million** net income, offset by **$1.4 million** in dividends and share repurchases - Key changes in shareholders' equity for Q1 2023 include: - Net income increased equity by **$3.5 million** - Dividends paid decreased equity by **$1.4 million** - Common share buybacks reduced equity by **$1.4 million**[21](index=21&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations was **$7.6 million** in Q1 2023, with significant investing in **$30.1 million** U.S. Treasury Notes, resulting in a **$26.1 million** net cash decrease Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,578,152 | $7,703,470 | | Net cash used in investing activities | $(30,921,070) | $(2,860,913) | | Net cash used in financing activities | $(2,779,880) | $(1,273,715) | | **(Decrease) increase in cash, cash equivalents, and restricted cash** | **$(26,125,398)** | **$3,574,244** | [Notes to the Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes detail accounting policies, revenue recognition, segment performance, shareholder equity activities, commodity hedging, and ongoing litigation with Chesapeake - On March 9, 2023, the Board authorized a new share repurchase program for up to **2,292,644 common shares**, representing **10% of outstanding shares**, for an aggregate price not to exceed **$15.0 million**. The program commenced on March 27, 2023[48](index=48&type=chunk) - The company declared a quarterly dividend of **$0.0625 per common share**, totaling approximately **$1.41 million**, which was paid on March 31, 2023[66](index=66&type=chunk) - Epsilon is engaged in **ongoing litigation with Chesapeake Appalachia, LLC**, claiming Chesapeake has **breached agreements** by failing to cooperate in developing resources in the Auburn Development. The matter is **currently stayed pending an appeal**[84](index=84&type=chunk)[88](index=88&type=chunk) - Subsequent to the quarter end, the company **divested two operated wells and 1,298 net acres** in Oklahoma and entered into an agreement to **acquire a 10% interest** in two wellbores in New Mexico for an **estimated $2.1 million**[119](index=119&type=chunk)[120](index=120&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses Q1 2023 financial results, highlighting a 31% revenue decrease due to lower natural gas prices, disciplined capital allocation, and a strong balance sheet [Overview and Business Strategy](index=25&type=section&id=Overview) Epsilon is an independent natural gas and oil company focused on onshore North American assets, aiming for high returns, a strong balance sheet, and shareholder returns - The company's business strategy is focused on **high rate of return capital investments** in onshore North American natural gas and oil basins[125](index=125&type=chunk) - Epsilon is committed to **disciplined capital allocation**, including **shareholder returns** through dividends and share buybacks[125](index=125&type=chunk) - The company is actively seeking **new investment opportunities** in several other onshore North American basins beyond its current positions in Pennsylvania and Oklahoma[126](index=126&type=chunk) [Operational Highlights](index=25&type=section&id=Operational%20Highlights) Q1 2023 Marcellus natural gas production slightly increased, but realized prices sharply declined, while Anadarko production remained flat with decreased realized prices Q1 2023 vs Q1 2022 Operational Metrics | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | **Marcellus (PA)** | | | | | Realized Gas Price ($/Mcf) | $2.56 | $4.47 | -43% | | Gas Production (Bcf) | 2.5 | 2.4 | +0.8% | | **Anadarko (OK)** | | | | | Realized Price ($/Mcfe) | $6.44 | $7.71 | -17% | | Total Production (Bcfe) | 0.17 | 0.17 | 0% | [Non-GAAP Financial Measures-Adjusted EBITDA](index=26&type=section&id=Non-GAAP%20Financial%20Measures-Adjusted%20EBITDA) Adjusted EBITDA for Q1 2023 decreased to **$5.6 million** from **$9.3 million** in Q1 2022, primarily due to lower net income from commodity price drops Adjusted EBITDA Reconciliation | | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Net income | $3,529,827 | $5,805,888 | | Adjustments | $2,111,008 | $3,479,095 | | **Adjusted EBITDA** | **$5,640,835** | **$9,284,983** | [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Total revenues for Q1 2023 decreased by 31% to **$9.4 million** due to lower natural gas prices, while G&A expenses increased significantly from management transition costs - **Upstream natural gas revenue decreased by $4.4 million (42%)** in Q1 2023 compared to Q1 2022, primarily due to lower natural gas prices[134](index=134&type=chunk) - **Gathering system revenue increased by $0.3 million (13%)** in Q1 2023, as anchor shipper volumes, which pay a full gathering rate, increased their share of total throughput[136](index=136&type=chunk) - **General & Administrative (G&A) expenses increased by $0.9 million (68%)** in Q1 2023, mainly due to **$0.4 million** in compensation for management transition and **$0.1 million** in legal fees related to the Chesapeake litigation[146](index=146&type=chunk) [Capital Resources and Liquidity](index=29&type=section&id=Capital%20Resources%20and%20Liquidity) As of March 31, 2023, Epsilon maintained a strong liquidity position with a **$50.8 million** working capital surplus and no outstanding debt on its credit facility - The company had a **working capital surplus of $50.8 million** as of March 31, 2023, an increase of **$1.6 million** from year-end 2022[150](index=150&type=chunk) - In Q1 2023, the company **invested $30.1 million in U.S. Treasury Notes** and used **$2.8 million** for financing activities, including dividends and share buybacks[149](index=149&type=chunk)[152](index=152&type=chunk)[154](index=154&type=chunk) - The company has a **senior secured credit facility** with a total commitment of up to **$100 million** and an **effective borrowing base of $30 million**, with **no borrowings outstanding**[155](index=155&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's earnings and cash flow are primarily exposed to commodity price risk, mitigated by derivative contracts, with minimal interest rate risk due to no outstanding debt - The company's **primary market risk** is the **fluctuation in commodity prices** for natural gas and oil[165](index=165&type=chunk) - Epsilon **manages commodity price risk** by entering into **derivative financial instruments**, such as NYMEX Henry Hub swaps and basis swaps, to hedge a portion of its natural gas production[162](index=162&type=chunk)[170](index=170&type=chunk) - **Interest rate risk is minimal** as of March 31, 2023, because there were **no outstanding balances** under the company's credit agreement[168](index=168&type=chunk)[169](index=169&type=chunk) [Controls and Procedures](index=32&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's **disclosure controls and procedures were effective** as of March 31, 2023[171](index=171&type=chunk) - **No material changes** to the company's **internal control over financial reporting occurred** during the first quarter of 2023[172](index=172&type=chunk) [PART II - OTHER INFORMATION](index=33&type=section&id=PART%20II%20OTHER%20INFORMATION) [Legal Proceedings](index=33&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) Epsilon is involved in ongoing litigation with Chesapeake Appalachia, LLC, alleging breach of contract, with the case currently stayed pending an appeal decision - Epsilon filed a **complaint** against Chesapeake Appalachia, LLC, alleging **breach of contract** and **failure to cooperate** in the development of resources in the Auburn Development[176](index=176&type=chunk) - The case is **currently stayed pending a decision** from the Third Circuit Court of Appeals on Epsilon's appeal of a prior dismissal. A decision is **not expected until mid-2023**[178](index=178&type=chunk)[179](index=179&type=chunk) [Risk Factors](index=33&type=section&id=ITEM%201A.%20RISK%20FACTORS) There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - There have been **no material changes** from the risk factors disclosed in the **Annual Report on Form 10-K** for the year ended December 31, 2022[180](index=180&type=chunk) [Unregistered Sale of Equity Securities and Use of Proceeds](index=33&type=section&id=ITEM%202.%20UNREGISTERED%20SALE%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section details the company's share repurchase activities during Q1 2023, including the termination of the 2022-2023 program and commencement of a new program Share Repurchase Activity - Q1 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | **2022-2023 Program** | | | | January 2023 | 125,200 | $5.96 | | February 2023 | 65,500 | $5.63 | | **Total (Program ended Mar 7)** | **190,700** | **$5.82** | | **2023-2024 Program** | | | | March 2023 (from Mar 27) | 47,220 | $5.32 | [Defaults Upon Senior Securities](index=34&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) Not applicable [Mine Safety Disclosures](index=34&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) Not applicable [Other Information](index=34&type=section&id=ITEM%205.%20OTHER%20INFORMATION) Not applicable [Exhibits](index=35&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the 10-Q report, including Sarbanes-Oxley certifications and Inline XBRL data files ```

Financial Data and Key Metrics Changes - Free cash flow before changes in working capital increased by 139% year-over-year to $35 million [8] - Cash balance increased by 69% year-over-year to $45.8 million, representing $1.96 per diluted share [8] - Net income for the year was $35.4 million, representing $1.51 per diluted share [12] - Adjusted EBITDA grew 120% year-over-year to $53.1 million [12] Business Line Data and Key Metrics Changes - Net revenue interest production was 27.3 MMcfe per day, down 6% year-over-year [12] - Production in Oklahoma increased to 2.6 MMcfe per day, a 30% increase over last year [16] - Midstream revenues increased by 3% year-over-year, with a 5% increase in throughput in the Auburn Gas Gathering System [17] Market Data and Key Metrics Changes - Average realized price for the year was $6.09 per Mcfe, with natural gas realizations nearly doubling year-over-year [9] - SEC proved reserves reported at year-end 2022 were 94.3 Bcfe, with an increase of 7.2 Bcfe in improved developed producing reserves [20] Company Strategy and Development Direction - The company is focused on maintaining a disciplined approach to capital allocation and is considering opportunities in Appalachia and other basins [33] - A new buyback program was announced, allowing for the repurchase of up to 10% of shares outstanding [44] - The company aims to return capital to shareholders through dividends and share buybacks while pursuing accretive business development opportunities [45] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's position for continued success in various commodity price environments [32] - The recent volatility in commodity prices is seen as an opportunity for attractive acquisitions and farm-out deals [26] - The board is comfortable with the current dividend policy and continues to evaluate it [38] Other Important Information - The company reported a debt-free balance sheet with available liquidity of approximately $75 million [13] - The PV10 value of SEC proved reserves increased by $85 million to $193 million due to higher SEC pricing [24] Q&A Session Summary Question: Thoughts on investing in Marcellus given current natural gas prices - Management acknowledged the challenges in the current investment environment but remains open to opportunities that meet their cost of capital criteria [28][36] Question: Concerns about share buyback effectiveness - Management noted that previous share count issues were due to management transitions and expressed commitment to reducing share count through buybacks [29] Question: Dividend policy outlook - Management confirmed that the board is comfortable with the current dividend level and continues to evaluate it based on earnings from the midstream system [38][52] Question: Investment capacity and deal sizes - Management indicated flexibility in considering both small and large investment opportunities, leveraging their strong balance sheet [74] Question: Hedging strategy updates - Management confirmed that the hedging position established in December remains in place, with no additional hedges implemented since then [75]

Financial Performance - Epsilon Energy Ltd. reported a net income of $35.4 million for 2022, a significant increase from $11.6 million in 2021[206]. - Total revenues for 2022 increased by $27.6 million, or 65%, reaching $70.0 million compared to $42.4 million in 2021, primarily due to higher prices[210]. - Net income for the year ended December 31, 2022, was $35,354,679, a significant increase from $11,627,517 in 2021, representing a growth of approximately 203%[234]. - Adjusted EBITDA for 2022 was $53,106,849, compared to $24,107,978 in 2021, reflecting a 120% increase[234]. - Cash provided by operating activities increased to $38.0 million in 2022, up $18.0 million or 90% from $20.0 million in 2021, primarily due to higher realized prices[239]. Revenue Sources - Natural gas revenue from Pennsylvania was $53.8 million in 2022, up from $29.9 million in 2021, with an average price increase from $3.04 to $5.96 per Mcf[212]. - The Auburn Gas Gathering System, located in the Marcellus Basin, is expected to maintain revenue despite short-term low commodity prices due to historically high recoverable reserves[277]. Costs and Expenses - Upstream operating costs increased by 13.1% to $9.4 million in 2022, attributed to extraordinary costs related to older wells[216]. - General and administrative expenses rose by $0.5 million, or 8%, to $7.3 million in 2022, driven by increased compensation costs[226]. - Total cash used for investing activities rose to $7.9 million in 2022, a $3.4 million or 77% increase from $4.4 million in 2021, mainly for upstream development costs[240]. Reserves and Cash Flows - Total estimated net proved reserves decreased by 20% to 94,254 MMcfe as of December 31, 2022, primarily due to a change in the development plan[207]. - The standardized measure of discounted future net cash flows increased to $145.8 million in 2022 from $77.7 million in 2021[208]. - The company had a working capital surplus of $51.0 million as of December 31, 2022, an increase of $26.9 million from $24.1 million in 2021, driven by increased realized prices[238]. Shareholder Actions - The company repurchased 982,500 common shares in 2022 at an average price of $6.32 per share, spending a total of $6,234,879[246]. - A new share repurchase program was authorized on March 9, 2023, allowing for the repurchase of up to 2,292,644 common shares for a total price not exceeding $15.0 million[249]. Financial Position and Liquidity - The company has a senior secured credit facility with a total commitment of up to $100 million, with an effective borrowing base of $30 million[242]. - As of December 31, 2022, the company had no off-balance sheet arrangements, ensuring transparency in financial obligations[255]. - The company anticipates that its current cash balance and cash flows will be sufficient to meet liquidity needs for the next 12 months and beyond[254]. Risk Management - Derivative financial instruments are utilized to hedge exposure to commodity price changes, with no contracts designated as cash flow hedges for accounting purposes[268]. - The company has a hedging strategy to manage risks associated with commodity price changes, stabilizing cash flows and supporting capital spending[280]. - The company believes credit risk related to counterparties in derivative contracts is minimal and does not anticipate nonperformance[269]. Regulatory and Market Factors - Changes in tax regulations and legislation in the U.S. and Canada may impact the company's income tax provision, which is computed using the asset-and-liability method[271]. - The company's earnings and cash flow are significantly affected by fluctuations in oil and natural gas prices, influenced by various market factors[276]. - The estimated fair value of derivative instruments requires substantial judgment and is based on various market factors, including option pricing models and futures prices[268].

Epsilon Energy Ltd. (NASDAQ:EPSN) Q3 2022 Earnings Conference Call November 11, 2022 11:00 AM ET Company Participants Andrew Williamson - CFO Jason Stabell – CEO Conference Call Participants Nat Stewart - N.a.s. Capital Operator Ladies and gentlemen, thank you for standing by. Welcome to the Epsilon Third Quarter 2022 Conference Call. During today's call, all parties will be in a listen-only mode. Following the company's prepared remarks, the call will be open for questions-and-answers. [Operator Instructio ...

Table of Contents 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 September 30, 2022 ☐ 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 o ...

Table of Contents 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 June 30, 2022 ☐ 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 ...

Financial Performance - Epsilon Energy Ltd. reported a net income of $5.8 million for the three months ended March 31, 2022, compared to $2.7 million for the same period in 2021, representing a 114.8% increase [117]. - The company's revenues increased by $5.2 million, or 61%, to $13.6 million for the three months ended March 31, 2022, compared to $8.4 million in the same period of 2021 [136]. - Adjusted EBITDA for the three months ended March 31, 2022, was $9.3 million, compared to $5.4 million for the same period in 2021, reflecting a 72.5% increase [134]. - Cash provided by operating activities increased by $2.1 million, or 38%, during the three months ended March 31, 2022, compared to the same period in 2021, driven by increased commodity prices [164]. Production and Pricing - Epsilon's realized natural gas price was $4.55 per Mcf, a 77% increase over the same period in 2021, while natural gas production remained flat at 2.4 Bcf [125]. - In Oklahoma, Epsilon's realized price for all production was $7.71 per Mcfe, a 117% increase over the same period in 2021, with total production of 0.17 Bcfe, a 141% increase [128]. - Upstream natural gas revenue increased by $4.4 million, or 69%, primarily due to higher natural gas prices, despite lower production volumes [138]. - Upstream oil and other liquids revenue surged by $0.7 million, or 625%, driven by increased production from new wells and higher prices [139]. Operating Costs - Operating costs for the three months ended March 31, 2022, totaled $1.93 million, with an upstream operating cost of $0.73 per Mcfe, compared to $1.78 million and $0.64 per Mcfe in the same period of 2021 [142]. - Upstream operating costs for the three months ended March 31, 2022 increased by $0.2 million, or 11%, compared to the same period in 2021, primarily due to rising service prices [143]. - Gathering system costs (net of intercompany elimination) for the three months ended March 31, 2022 decreased by $0.03 million, or 17%, compared to the same period in 2021, mainly due to a decrease in throughput volumes [146]. - DD&A expense decreased by $0.33 million, or 20%, for the three months ended March 31, 2022 compared to the same period in 2021, attributed to increased reserves and decreased production volumes [151]. - General and administrative expenses decreased by $0.2 million, or 14%, for the three months ended March 31, 2022, mainly due to reduced legal fees and stock-based compensation [155]. - Interest expense decreased by $0.01 million, or 43%, for the three months ended March 31, 2022, due to a reduction in the borrowing base on the line of credit [156]. Capital and Investment - The company had a working capital surplus of $27.6 million as of March 31, 2022, an increase of $3.5 million from December 31, 2021, due to cash generated from operations [163]. - The company used $2.9 million for investing activities during the three months ended March 31, 2022, primarily on leasehold and development costs [165]. - The company has a senior secured credit facility with a total commitment of up to $100 million, with a current effective borrowing base of $14 million [167]. Risk Management - The company hedged approximately 15% of its anticipated remaining 2022 production through NYMEX costless collars to mitigate price volatility [179]. - Natural gas prices are influenced by various economic and political factors, and the company has implemented a hedging strategy to manage commodity price risks [186]. Operational Strategy - The company aims to maintain or modestly grow production levels in 2022, contingent on sufficient natural gas prices and achieving internal return rates [122]. - The Auburn Gas Gathering System is located in the Marcellus Basin, known for high recoverable reserves and low production costs, indicating resilience against short-term low commodity prices [182]. - The company has a credit agreement that allows for fixing interest rates for up to three months, with no outstanding principal balance as of March 31, 2022 and 2021 [184].

Financial Performance - Epsilon Energy Ltd. reported a net income of $11.6 million for 2021, a significant increase from $0.9 million in 2020[199]. - Total revenues for the year ended December 31, 2021, increased by $18.0 million, or 73.6%, reaching $42.4 million compared to $24.4 million in 2020[201]. - Adjusted EBITDA increased to $24,107,978 for the year ended December 31, 2021, from $15,690,955 in 2020, reflecting improved operational performance[226]. - Cash flow from operating activities increased by $5.2 million, or 35%, to $20.0 million for the year ended December 31, 2021, compared to $14.8 million in 2020[231]. - The company had a working capital surplus of $24.1 million as of December 31, 2021, an increase of $10.8 million from $13.3 million at the end of 2020[229]. Revenue Breakdown - Natural gas revenue rose to $31.7 million in 2021, up 108% from $15.2 million in 2020, driven by higher prices despite a decrease in production volume[202][204]. - The average price of natural gas increased from $1.36 per Mcf in 2020 to $3.10 per Mcf in 2021[202]. - Upstream oil and other liquids revenue surged by $2.5 million, or 736%, in 2021, attributed to increased production from new wells and higher oil prices[204]. Costs and Expenses - Operating costs for upstream activities decreased by $0.2 million, or 2.1%, in 2021, primarily due to lower production volumes[207]. - Depletion, depreciation, amortization, and accretion (DD&A) expenses decreased by $2.9 million, or 31%, in 2021, due to increased reserves and lower production volumes[213]. - General and Administrative (G&A) expenses increased by $1.2 million, or 22%, to $6,831,815 for the year ended December 31, 2021, compared to $5,589,963 in 2020[219]. - Interest expense decreased by $0.01 million, or 11%, to $101,382 for the year ended December 31, 2021, from $114,515 in 2020, due to a reduction in the borrowing base on the line of credit[220]. Asset Management - Epsilon's total estimated net proved reserves of natural gas increased by 22,311 MMcf to 110,969 MMcf as of December 31, 2021[199]. - The company uses the successful efforts method of accounting for natural gas and oil operations, capitalizing costs associated with successful exploratory and development wells[249]. - Proved natural gas and oil reserves are estimated according to SEC regulations, impacting financial accounting estimates such as depreciation and depletion[251]. - Unproved properties consist of costs incurred to acquire unproved leases, which are capitalized until leases expire or are identified for reversion[253]. - The company evaluates impairment of proved and unproved properties based on expected future cash flows compared to carrying values, with potential material revisions to reserve estimates[259]. Strategic Outlook - The company aims to maintain or modestly grow production levels in 2022, contingent on sufficient natural gas prices and achieving internal return rates[196]. - Capital expenditures commitments amounted to approximately $3.8 million, expected to be incurred in 2022[244]. - The company expects that its estimated net cash generated from operations will be adequate to meet liquidity needs for the next 12 months and beyond[245]. Risk Management - The company has established a hedging strategy to manage risks associated with changes in commodity prices, stabilizing cash flows and supporting capital spending[272]. - Changes in market prices of commodities significantly affect the company's earnings and cash flow, with fluctuations influenced by various economic factors[268]. - The carrying value of assets is reviewed for impairment when indicators suggest recoverability issues, such as changes in business plans or commodity prices[257]. - The company recognizes asset retirement obligations at fair value, which includes estimated future costs for plugging and abandonment of wells[264]. Debt and Financing - As of December 31, 2021, the outstanding principal balance under the credit agreement was nil, indicating no current debt obligations[271]. - The company has a senior secured credit facility with a total commitment of up to $100 million, with a current effective borrowing base of $14 million[234]. Other Income - Epsilon recorded a gain on the sale of properties amounting to $484,902 in 2021, compared to no sales in 2020[216][217]. - Net loss on commodity contracts was $4,482,909 for the year ended December 31, 2021, compared to a gain of $2,503,655 in 2020, with net cash settlements of $4,243,085 paid in 2021[221].

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) The company's assets grew to $96.2M, with net income turning positive to $3.65M for the nine-month period Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $20,592,298 | $13,270,913 | | Total current assets | $28,664,894 | $17,778,069 | | Total property and equipment, net | $66,959,550 | $68,331,878 | | **Total assets** | **$96,192,178** | **$86,676,184** | | Total current liabilities | $12,628,525 | $4,510,380 | | Total liabilities | $25,165,376 | $17,656,741 | | **Total shareholders' equity** | **$71,026,802** | **$69,019,443** | Condensed Consolidated Statements of Operations Highlights (Unaudited) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Total revenue | $28,632,220 | $18,517,244 | | Operating income (loss) | $11,723,863 | $(2,442,113) | | **Net income (loss)** | **$3,647,008** | **$(548,518)** | | Net income (loss) per share, diluted | $0.15 | $(0.02) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $13,526,750 | $12,093,463 | | Net cash used in investing activities | $(3,825,051) | $(5,491,616) | | Net cash used in financing activities | $(2,377,181) | $(9,078,522) | | **Increase (decrease) in cash** | **$7,323,261** | **$(2,468,384)** | [Note 1. Description of Business](index=10&type=section&id=1.%20Description%20of%20Business) Epsilon Energy is a US-based natural gas acquisition, development, and production company - The Company is engaged in the acquisition, development, gathering and production of primarily natural gas reserves in the United States[23](index=23&type=chunk) [Note 5. Revolving Line of Credit](index=12&type=section&id=5.%20Revolving%20Line%20of%20Credit) The credit facility maturity was extended to 2024, with the borrowing base reduced to $14M and no outstanding debt - On April 6, 2021, the credit agreement was amended to extend the maturity date to March 1, 2024, and the borrowing base was decreased from $23 million to **$18 million**[46](index=46&type=chunk) - On June 28, 2021, the borrowing base was further decreased from $18 million to **$14 million**[47](index=47&type=chunk) - As of September 30, 2021, there were **no borrowings** under the revolving line of credit and the company was in compliance with all financial covenants[49](index=49&type=chunk)[51](index=51&type=chunk) [Note 6. Shareholders' Equity](index=13&type=section&id=6.%20Shareholders%27%20Equity) The company repurchased 525,615 shares for $2.38M and recorded $738,789 in stock compensation expense Share Repurchase Activity (Jan 1, 2021 - Sep 30, 2021) | Period | Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | **Total YTD** | **525,615** | **$4.52** | - The company's 2020 Equity Incentive Plan authorizes the issuance of up to **2,000,000 Common Shares** for compensation in the form of stock options, restricted stock, PSUs, and other awards[61](index=61&type=chunk) - Stock compensation expense for the nine months ended September 30, 2021, was **$738,789**, comprising $402,247 for Restricted Stock and $336,542 for PSUs[63](index=63&type=chunk)[75](index=75&type=chunk) [Note 7. Revenue Recognition](index=17&type=section&id=7.%20Revenue%20Recognition) Total operating revenue grew to $28.6M for the nine-month period, driven by a sharp rise in natural gas revenue Operating Revenue Breakdown (Nine Months Ended) | Revenue Source | September 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Natural gas | $20,950,378 | $11,470,012 | | Natural gas liquids | $588,685 | $56,705 | | Oil and condensate | $1,201,289 | $190,180 | | Gathering and compression fees | $5,891,868 | $6,800,347 | | **Total operating revenue** | **$28,632,220** | **$18,517,244** | [Note 9. Commitments and Contingencies](index=20&type=section&id=9.%20Commitments%20and%20Contingencies) The company has $1.8M in capital commitments and is involved in ongoing litigation with Chesapeake Appalachia - As of September 30, 2021, the Company had commitments of **$1.8 million** for capital expenditures[98](index=98&type=chunk) - On March 10, 2021, Epsilon filed a complaint against Chesapeake Appalachia, LLC, claiming **breach of settlement and operating agreements** concerning the Auburn Development in Pennsylvania[99](index=99&type=chunk) [Note 11. Operating Segments](index=21&type=section&id=11.%20Operating%20Segments) The Upstream segment drove performance with $13.0M in net earnings, while the Gas Gathering segment contributed $4.3M Segment Performance (Nine Months Ended Sep 30, 2021) | Segment | Operating Revenue | Net Earnings (Loss) | | :--- | :--- | :--- | | Upstream | $22,740,352 | $12,965,907 | | Gas Gathering | $7,088,836 | $4,333,909 | | Corporate | $0 | $(13,652,808) | - The company's reportable segments are **Upstream** (oil and gas production), **Gas Gathering** (midstream operations), and **Corporate**[107](index=107&type=chunk) [Note 12. Risk Management Activities](index=24&type=section&id=12.%20Risk%20Management%20Activities) The company recognized a $6.4M net loss on commodity derivative contracts used to manage price risk - For the nine months ended September 30, 2021, Epsilon recognized losses on commodity derivative contracts of **$6,417,123**, which included cash settlements of $2,488,702[119](index=119&type=chunk) Outstanding Derivative Contracts as of September 30, 2021 | Derivative Type | Volume (MMbtu) | Period | Fair Value (Liability) | | :--- | :--- | :--- | :--- | | Two-way costless collar | 610,000 | 2021 | $(1,589,765) | | Two-way costless collar | 900,000 | 2022 | $(2,338,656) | | **Total** | **1,510,000** | | **$(3,928,421)** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Higher commodity prices drove a 55% revenue increase and a return to profitability, with strong liquidity [Overview & Business Strategy](index=27&type=section&id=Overview%20%26%20Business%20Strategy) The company focuses on managing cash flow from its North American onshore assets to generate attractive returns - The company's business strategy is to manage cash flow from its producing leasehold and midstream assets to provide **attractive rates of return**[132](index=132&type=chunk) - Epsilon's primary area of operation is **Pennsylvania**, with assets concentrated in areas conducive to multi-well, repeatable drilling programs[129](index=129&type=chunk) [Operational Highlights](index=28&type=section&id=Operational%20Highlights) Q3 2021 saw significant realized price increases in both the Marcellus Shale (191%) and Anadarko Basin (511%) - **Marcellus Shale (Pennsylvania):** Realized natural gas price was **$3.43 per Mcf** in Q3 2021, a 191% increase over Q3 2020, while natural gas production was 2.6 Bcf[139](index=139&type=chunk)[140](index=140&type=chunk) - **Anadarko (Oklahoma):** Realized price for all production was **$6.17 per Mcfe** in Q3 2021, a 511% increase over Q3 2020, with total production increasing 444% to 0.37 Bcfe[142](index=142&type=chunk)[144](index=144&type=chunk) [Non-GAAP Financial Measures-Adjusted EBITDA](index=29&type=section&id=Non-GAAP%20Financial%20Measures-Adjusted%20EBITDA) Adjusted EBITDA for the nine-month period increased to $15.2M from $11.7M year-over-year Reconciliation of Net Income to Adjusted EBITDA | Period | Net Income (Loss) | Adjusted EBITDA | | :--- | :--- | :--- | | **Nine Months 2021** | **$3,647,008** | **$15,152,089** | | Nine Months 2020 | $(548,518) | $11,699,423 | | **Three Months 2021** | **$1,396,466** | **$6,787,384** | | Three Months 2020 | $(292,783) | $3,943,131 | [Results of Operations](index=30&type=section&id=Results%20of%20Operations) Revenue rose 55% to $28.6M due to higher prices, while operating costs decreased and G&A expenses increased - For the nine months ended September 30, 2021, revenues increased **$10.1 million, or 55%**, to $28.6 million, primarily due to increased commodity prices[150](index=150&type=chunk) - Upstream operating costs for the nine months **decreased by $0.6 million (9.8%)** due to a reduction in the PA impact fee and lower discretionary maintenance spending[157](index=157&type=chunk) - DD&A expense **decreased by $2.59 million (33%)** for the nine months, mainly due to an increase in reported reserves and lower production volumes[166](index=166&type=chunk) - G&A expenses for the nine months **increased by $1.4 million (34%)** due to higher legal fees, CEO compensation, and stock-based compensation[171](index=171&type=chunk) [Capital Resources and Liquidity](index=34&type=section&id=Capital%20Resources%20and%20Liquidity) The company maintained strong liquidity with a $16.0M working capital surplus and no debt - At September 30, 2021, the company had a **working capital surplus of $16.0 million**, an increase of $2.7 million from December 31, 2020[180](index=180&type=chunk) - For the nine months ended September 30, 2021, cash provided by operating activities was **$13.5 million**, a 12% increase from the prior year[181](index=181&type=chunk) - Since January 1, 2021, Epsilon has repurchased **525,615 common shares for $2,377,181** under its share repurchase program[191](index=191&type=chunk) - The company has a senior secured credit facility with a current borrowing base of **$14 million** and no outstanding borrowings[184](index=184&type=chunk)[190](index=190&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company is primarily exposed to commodity price risk, which it mitigates through derivative hedging contracts - The company's earnings and cash flow are significantly affected by changes in the market price of commodities like **natural gas and oil**[199](index=199&type=chunk) - Epsilon has established a hedging strategy and enters into **derivative financial instruments** to manage the risk associated with changes in commodity prices and stabilize cash flows[204](index=204&type=chunk) - **Interest rate risk is minimal** as the outstanding principal balance under the credit agreement was nil at September 30, 2021[203](index=203&type=chunk) [Item 4. Controls and Procedures](index=37&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Disclosure controls were deemed ineffective due to a material weakness in recording realized hedge losses - Management concluded that as of September 30, 2021, **disclosure controls and procedures were not effective**[206](index=206&type=chunk) - The ineffectiveness was due to a **material weakness** in internal control over financial reporting related to the accounts payable/accrual function regarding the recording of realized hedge losses[206](index=206&type=chunk) - Management is developing a remediation plan which is expected to include incremental training and enhanced review of transactions and account reconciliations[208](index=208&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=38&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is in an ongoing legal dispute with Chesapeake Appalachia over development agreements - On March 10, 2021, Epsilon filed a complaint against Chesapeake Appalachia, LLC, claiming **breach of settlement and operating agreements** related to the Auburn Development in North-Central Pennsylvania[213](index=213&type=chunk) - The court granted Chesapeake's motion to dismiss on a narrow issue, but Epsilon has filed a motion for reconsideration, which was expected to be fully briefed by November 1, 2021[214](index=214&type=chunk) [Item 1A. Risk Factors](index=38&type=section&id=ITEM%201A.%20RISK%20FACTORS) No material changes to risk factors were reported since the company's 2020 Annual Report on Form 10-K - There have been **no material changes** from the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020[215](index=215&type=chunk) [Item 2. Unregistered Sale of Equity Securities and Use of Proceeds](index=38&type=section&id=ITEM%202.%20UNREGISTERED%20SALE%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) The company repurchased 525,615 common shares for $2.38M as part of its ongoing share buyback program Share Repurchase Summary (YTD as of Sep 30, 2021) | Metric | Value | | :--- | :--- | | Total shares purchased | 525,615 | | Average price per share | $4.52 | | Maximum shares remaining for purchase | 667,385 | - The share repurchase program commenced on January 1, 2021, and will end on December 31, 2021, unless terminated earlier, with purchases funded out of available cash[217](index=217&type=chunk) [Other Items (3, 4, 5, 6)](index=39&type=section&id=Other%20Items) Items 3, 4, and 5 were not applicable, while Item 6 lists the exhibits filed with the report - Items 3, 4, and 5 are noted as **'Not applicable'**[218](index=218&type=chunk)[219](index=219&type=chunk) - Item 6 lists the exhibits filed with the 10-Q, including SOX 302 and 906 certifications and Inline XBRL documents[221](index=221&type=chunk)