Epsilon Energy .(EPSN) - 2019 Q1 - Quarterly Report

FORWARD-LOOKING STATEMENTS The report's forward-looking statements involve inherent risks and uncertainties, and the company does not commit to public updates unless legally mandated - Forward-looking statements are based on reasonable assumptions but involve known and unknown risks and uncertainties that may cause actual results to differ materially from those anticipated[8] - The company undertakes 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[8] PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents Epsilon Energy Ltd.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, equity changes, cash flows, and explanatory notes Unaudited Condensed Consolidated Balance Sheets The balance sheets detail the company's financial position as of March 31, 2019, showing increases in total assets and shareholders' equity compared to December 31, 2018 Condensed Consolidated Balance Sheet Highlights | Metric | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Total Current Assets | $21,778,046 | $19,893,335 | | Total Non-Current Assets | $68,611,132 | $68,004,374 | | Total Assets | $90,389,178 | $87,897,709 | | Total Current Liabilities | $6,784,466 | $6,339,190 | | Total Non-Current Liabilities | $12,390,818 | $11,614,432 | | Total Liabilities | $19,175,284 | $17,953,622 | | Total Shareholders' Equity | $71,213,894 | $69,944,087 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income The statements of operations indicate a decrease in net income for Q1 2019, primarily driven by a loss on derivative contracts compared to a gain in Q1 2018 Condensed Consolidated Statements of Operations Highlights (Three Months Ended March 31) | Metric | 2019 | 2018 | | :------------------------------------- | :----------- | :----------- | | Total Revenue | $7,946,014 | $7,778,002 | | Total Operating Costs and Expenses | $5,330,093 | $4,958,518 | | Operating Income | $2,615,921 | $2,819,484 | | Gain (loss) on derivative contracts | $(510,754) | $370,981 | | Income before tax | $2,120,272 | $3,146,269 | | Income tax expense | $746,596 | $987,042 | | NET INCOME | $1,373,676 | $2,159,227 | | Net income per share, basic | $0.05 | $0.08 | Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity This statement outlines changes in shareholders' equity for Q1 2019, reflecting net income, stock-based compensation, share buybacks, and other comprehensive income Changes in Shareholders' Equity (Three Months Ended March 31, 2019) | Item | Amount | | :------------------------------------ | :----------- | | Balance at December 31, 2018 | $69,944,087 | | Net income | $1,373,676 | | Stock-based compensation expenses | $133,720 | | Buyback and retirement of common shares | $(248,381) | | Other comprehensive loss | $10,792 | | Balance at March 31, 2019 | $71,213,894 | Unaudited Condensed Consolidated Statements of Cash Flows The cash flow statement shows a substantial increase in net cash from operating activities for Q1 2019, alongside a significant rise in cash used for investing activities Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31) | Cash Flow Activity | 2019 | 2018 | | :------------------------------------ | :----------- | :----------- | | Net cash provided by operating activities | $3,938,717 | $2,422,710 | | Net cash used in investing activities | $(1,511,054) | $(318,703) | | Net cash used in financing activities | $(248,381) | $(54,311) | | Increase in cash and cash equivalents | $2,190,074 | $1,993,187 | | Cash and cash equivalents, end of year | $16,591,331 | $11,992,040 | Notes to the Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures for the financial statements, encompassing business description, accounting policies, assets, debt, equity, taxes, commitments, and risk management 1. Description of Business Epsilon Energy Ltd. is a Canadian company focused on natural gas reserves in the US, having recently delisted from TSX to trade on NASDAQ Global Market - Epsilon Energy Ltd. is engaged in the acquisition, development, gathering and production of primarily natural gas reserves in the United States[21] - Epsilon voluntarily delisted its common shares from the TSX effective March 15, 2019, and began trading on the NASDAQ Global Market under the trading symbol "EPSN" on February 19, 2019[21] 2. Basis of Preparation This note outlines the accounting principles for interim financial statements, covering GAAP compliance, consolidation, estimates, and new accounting standards - The unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and SEC rules, with certain information and footnote disclosures condensed or omitted[23] - The Corporation's consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, Epsilon Energy USA, Inc. and its wholly owned subsidiaries, Epsilon Midstream, LLC, Dewey Energy GP, LLC, and Dewey Energy Holdings, LLC. Proportionate consolidation accounting is used for the gathering system[24] - Management makes significant estimates, particularly for proved oil and natural gas reserves, asset retirement obligations, and commodity derivative instruments[25] - As an emerging growth company (EGC), Epsilon has elected to take advantage of the extended transition period for complying with new or revised accounting standards, deferring adoption until they apply to private companies[26] - The company does not anticipate ASU 2018-13 (Fair Value Measurement) or ASU 2016-02 (Leases) to materially affect its financial statements[29][30] 3. Property and Equipment This section summarizes the Corporation's net property and equipment as of March 31, 2019, including recent acquisitions and impairment assessments Property and Equipment, Net | Category | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Total oil and gas properties, net | $55,405,948 | $54,542,839 | | Total gathering system, net | $12,456,159 | $12,903,274 | | Total property and equipment, net | $67,862,107 | $67,446,113 | - The Corporation acquired additional acres in the Anadarko Basin for $596 thousand during the three months ended March 31, 2019[34] - No impairment was required for proved and unproved oil and gas properties or gathering system assets as of March 31, 2019, and December 31, 2018[35] 4. Revolving Line of Credit Epsilon Energy USA Inc.'s revolving credit facility was extended to March 2022 with a $23 million borrowing base, and the company complied with all financial covenants as of March 31, 2019 - On January 7, 2019, the maturity date of the Credit Facility was extended to March 1, 2022, and the borrowing base was increased from $15 million to $23 million[38] - The Corporation is required to maintain acceptable commodity hedging agreements covering at least 25% of projected production of natural gas for the succeeding calendar year, along with 50% for the current calendar year[38] - The Corporation was in compliance with the financial covenants (Interest coverage ratio > 3, Current ratio > 1, Leverage ratio < 3.5) of the Credit Facility as of March 31, 2019, and December 31, 2018[39][40][41][43] Revolving Line of Credit Status | Metric | March 31, 2019 | December 31, 2018 | | :--------------------- | :------------- | :---------------- | | Balance | $0 | $0 | | Current Borrowing Base | $23,000,000 | $23,000,000 | | Interest Rate (3 mo. LIBOR +) | 2.75% | 2.75% | | Weighted Average Interest Rate (March 31, 2019) | 5.3% | N/A | 5. Shareholders' Equity This section details shareholders' equity components, including authorized and issued shares, stock option plans, restricted stock awards, share buybacks, and stock-based compensation Authorized shares The Corporation is authorized to issue an unlimited number of Common and Preferred Shares, both without par value - The Corporation 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[45] Issued The company repurchased 57,100 common shares via its NCIB program in Q1 2019 at an average price of $4.26 per share Share Capital Summary | Item | Number of Shares Issued | Amount ($) | | :------------------------------------------------------------------------------------------------ | :---------------------- | :------------- | | Balance at December 31, 2018 | 27,385,133 | $143,611,023 | | Vesting of restricted shares of stock | 54,167 | — | | Buyback of Shares (includes 26,953 shares purchased in 2018, but retired February 1, 2019) | (84,053) | (248,381) | | Balance at March 31, 2019 | 27,355,247 | $143,362,642 | - The Corporation repurchased 57,100 shares of common stock through a normal-course issuer bid ("NCIB") program during the three months ended March 31, 2019, at an average price of $4.26 per share[47] Stock Options The company's stock option plan covers 280,000 common shares at an average price of $5.01 as of March 31, 2019, with $20,770 in unrecognized stock-based compensation - Through March 31, 2019, the Corporation had issued stock options covering 280,000 Common Shares at an overall average price of $5.01 per Common Share, with a maximum of 720,000 Common Shares available for future issuances[51][52] - At March 31, 2019, the Corporation had unrecognized stock based compensation of $20,770 to be recognized over a weighted average period of 0.53 years[53] - Stock compensation expense recognized for the three months ended March 31, 2019, was $6,301, compared to $25,644 for the same period in 2018[53] Share Compensation Plan The Share Compensation Plan enables common share issuance to participants; Q1 2019 saw no new restricted shares awarded, but $127,419 in stock compensation expense was recognized from previously granted restricted stock - No shares of Restricted Stock were awarded for the three months ended March 31, 2019[56] - Stock compensation expense recognized during the three months ended March 31, 2019, was $127,419, compared to $57,403 for the same period in 2018[58] Restricted Stock Activity (Non-Vested) | Item | March 31, 2019 | December 31, 2018 | | :------------------------------------------------ | :------------- | :---------------- | | Balance non-vested Restricted Stock at beginning of period | 282,833 | 162,500 | | Granted | — | 174,500 | | Vested | — | (54,167) | | Balance non-vested Restricted Stock at end of period | 282,833 | 282,833 | 6. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income primarily reflects currency translation adjustments, with a $10,792 translation gain reported in Q1 2019 Accumulated Other Comprehensive Income (Loss) | Item | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Balance at beginning of period | $9,797,930 | $9,913,236 | | Translation gain (loss) other | $10,792 | $(56,509) | | Balance at end of period | $9,808,722 | $9,856,727 | 7. Income Taxes Q1 2019 income tax expense was $746,596, solely from deferred taxes, a decrease from the prior year, with a higher effective tax rate due to state taxes and a Canadian net operating loss valuation allowance Income Tax Provisions (Three Months Ended March 31, in thousands) | Category | 2019 | 2018 | | :----------------------------- | :------------------ | :------------------ | | Current Income Tax Expense | $0 | $1,148 | | Deferred Tax Expense (Benefit) | $747 | $(162) | | Total Income Tax Expense | $747 | $987 | - The effective tax rate for the three months ended March 31, 2019, was higher than the statutory federal rate primarily as a result of state income taxes and the valuation allowance against the Canadian net operating loss[64] 8. Commitments and Contingencies As of March 31, 2019, the Corporation's future minimum lease commitments total $67,291, with no capital expenditure commitments or material litigation Future Minimum Lease Commitments (as of March 31, 2019) | Year Ended December 31 | Payments ($) | | :--------------------- | :------- | | 2019 | $60,562 | | 2020 | $6,729 | | Total | $67,291 | - As of March 31, 2019, the Corporation had no commitments for capital expenditures[65] - The Corporation is not currently involved in any litigation, and management believes the potential for litigation is remote and would not have a material adverse impact on the Corporation's financial position or results of operations[66] 9. Net Income (Loss) Per Share Basic and diluted net income per share decreased to $0.05 in Q1 2019 from $0.08 in the prior year, reflecting dilutive stock options and unvested restricted shares Net Income Per Share (Three Months Ended March 31) | Metric | 2019 | 2018 | | :------------------------------------ | :----- | :----- | | Net income available to shareholders | $1,373,676 | $2,159,227 | | Net income per share, basic | $0.05 | $0.08 | | Net income per share, diluted | $0.05 | $0.08 | Weighted Average Shares Outstanding (Three Months Ended March 31) | Share Type | 2019 | 2018 | | :------------------------------------ | :----------- | :----------- | | Basic weighted-average number of shares outstanding | 27,392,755 | 27,521,504 | | Dilutive stock options | 12,204 | 11,053 | | Unvested restricted shares granted | 3,415 | — | | Diluted weighted average shares outstanding | 27,408,374 | 27,532,557 | - Anti-dilutive options (267,796) and anti-dilutive unvested restricted shares (279,418) were excluded from the diluted EPS calculation for the three months ended March 31, 2019[69][70] 10. Operating Segments Epsilon operates three segments: Upstream (US oil/gas), Gas Gathering (natural gas system), and Canada (corporate functions), with performance assessed by operating profit or loss - The Corporation's reportable segments are Upstream, Gas Gathering, and Canada[73] - The Upstream segment activities include acquisition, development and production of oil, natural gas, and other liquid reserves on properties within the United States[73] - The Gas Gathering segment partners with two other companies to operate a natural gas gathering system[73] Operating Segment Performance (Three Months Ended March 31, 2019, in thousands) | Metric | Upstream | Gas Gathering | Canada | Corporate | Elimination | Consolidated | | :-------------------------- | :----------- | :------------ | :----- | :---------- | :---------- | :----------- | | Total operating revenue | $5,508 | $2,701 | $0 | $0 | $(263) | $7,946 | | Net earnings for the period | $2,436 | $1,653 | $0 | $(2,716) | $0 | $1,374 | | Operating costs | $1,718 | $576 | $0 | $0 | $(263) | $2,031 | | Capital expenditures | $2,187 | $25 | $0 | $0 | $0 | $2,212 | - Inter-segment sales of $0.26 million for the three months ended March 31, 2019, were eliminated upon consolidation[74] 11. Risk Management Activities Epsilon manages commodity price risk with derivative instruments to stabilize cash flows, recognizing a $510,754 loss on derivative contracts in Q1 2019 Commodity Price Risks Epsilon uses commodity derivatives to manage natural gas price volatility and protect cash flows, incurring a $510,754 loss on these contracts in Q1 2019 - Epsilon enters into commodity derivative instruments (fixed price swaps, basis swaps, costless collars) to mitigate commodity price risk associated with a portion of its future natural gas production and related cash flows[80] - During the three months ended March 31, 2019, Epsilon recognized losses on commodity derivative contracts of $0.51 million, which included cash paid on settlements of $0.18 million[81] - For the three months ended March 31, 2018, Epsilon recognized gains of $0.37 million on derivative contracts, net of cash received on settlements of $0.11 million[81] Commodity Derivative Contracts As of March 31, 2019, Epsilon held natural gas fixed price and basis swap contracts for 2019-2020, with a net fair value liability of $(623,533), all with reliable financial institutions Natural Gas Price and Basis Swap Contracts (as of March 31, 2019) | Derivative Type | Volume (Mmbtu) | Weighted Average Price ($/MMbtu) | Basis Differential ($/MMbtu) | Fair Value (March 31, 2019) ($) | | :---------------- | :------------- | :------------------------------- | :--------------------------- | :-------------------------- | | 2019 | | | | | | Fixed price swap | 4,287,500 | $2.80 | $0 | $(13,020) | | Basis swap | 4,287,500 | $0 | $(0.49) | $(479,062) | | 2020 | | | | | | Fixed price swap | 3,111,000 | $2.73 | $0 | $(16,690) | | Basis swap | 3,111,000 | $0 | $(0.47) | $(114,761) | | Total | | | | $(623,533) | - All of the Corporation's derivative contracts were with large financial institutions, and the Corporation does not anticipate non-performance by such counterparties[85] Net Fair Value of Derivatives | Item | March 31, 2019 ($) | December 31, 2018 ($) | | :------------------------------------------------ | :------------- | :---------------- | | Fair value of asset (liability), beginning of year | $(297,023) | $259,544 | | Gains (losses) on derivative contracts included in earnings | $(510,754) | $370,981 | | Settlement of commodity derivative contracts | $184,244 | $(106,456) | | Fair value of liability, end of year | $(623,533) | $524,069 | 12. Asset Retirement Obligations Asset retirement obligations, estimated based on ownership and reclamation costs, increased to $1,654,944 as of March 31, 2019, primarily due to accretion - Asset retirement obligations were estimated by management based on Epsilon's net ownership interest in all wells and the gathering system, estimated costs to reclaim and abandon such assets and the estimated timing of the costs to be incurred in future periods[87] Changes in Asset Retirement Obligations | Item | Three Months Ended March 31, 2019 ($) | Year Ended December 31, 2018 ($) | | :-------------------------------- | :-------------------------------- | :--------------------------- | | Balance beginning of period | $1,625,154 | $1,646,601 | | Liabilities from drilling of new wells | $2 | $1,590 | | Change in estimates | $0 | $(137,490) | | Accretion | $29,788 | $114,453 | | Balance end of period | $1,654,944 | $1,625,154 | 13. Fair Value Measurements Fair value measurement methodologies remained consistent, with cash, receivables, and payables at cost, and commodity derivatives valued using an income approach with observable market data - Cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these instruments[91] - Commodity derivative instruments are valued based on an income approach, considering observable market assumptions (Level 2 within the valuation hierarchy)[92] 14. Consolidation of Common Shares Shareholders approved a 1-for-2 common share consolidation to meet Nasdaq standards, with all share amounts in the statements presented on this post-consolidation basis since December 24, 2018 - The shareholders of the Corporation approved a Consolidation of the issued and outstanding common shares on the basis of one (1) new common share for up to every existing two (2) common shares[93] - The consolidation commenced trading on a post-Consolidation basis on the TSX on December 24, 2018. All share amounts and per share data are presented in these statements on a post-Consolidation basis[93] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section offers management's analysis of Epsilon Energy Ltd.'s financial condition and Q1 2019 results, covering key trends, business strategy, operational highlights, and liquidity Overview Epsilon is a North American onshore independent oil and gas company operating in Pennsylvania and Oklahoma, reporting Q1 2019 net income of $1.4 million, down from $2.2 million in Q1 2018 - Epsilon is a North American on-shore focused independent oil and gas company engaged in the acquisition, development, gathering and production of oil and gas reserves, with primary operations in Pennsylvania and Oklahoma[96] - Epsilon owns a 35% interest in the Auburn Gas Gathering System, to which all production from its Pennsylvania acreage is dedicated[97] - Epsilon realized net income of $1.4 million during the three months ended March 31, 2019, as compared to net income of $2.2 million for the three months ended March 31, 2018[98] Business Strategy Epsilon's strategy focuses on maximizing Marcellus and Anadarko asset value, converting leasehold interests to proved reserves, optimizing cash flow, and adjusting Marcellus production based on pricing - Epsilon's business strategy involves focused targeting of natural gas and oil properties within the United States with the goal of converting leasehold interests into proved reserves and optimizing cash flow[99] - Since July 2013, Epsilon has narrowed its strategic focus to its core upstream and gathering system assets in the Marcellus shale in Pennsylvania, and the Anadarko Basin in Oklahoma[100] - Epsilon intends to invest capital to increase production from both the lower and upper Marcellus reservoirs when natural gas pricing improves[101] - The company prefers to produce less natural gas in the Marcellus due to unfavorable local natural gas prices caused by infrastructure limitations, though a large infrastructure project has begun to have a positive impact[102][104] Operational Highlights Q1 2019 operational highlights include a 17% increase in Marcellus natural gas price to $2.96 per Mcf, while Anadarko Basin realized prices decreased 6.9% to $3.93 per Mcfe, with total production down 9% Marcellus Shale – Pennsylvania Marcellus Shale saw a 17% increase in realized natural gas price to $2.96 per Mcf in Q1 2019, with production at 1.78 Bcf and the Auburn System gathering 24.9 Bcf gross - During the three months ended March 31, 2019, Epsilon's realized natural gas price in the Marcellus Shale was $2.96 per Mcf, a 17% increase over the same period in 2018[105] - Total natural gas production for the three months ended March 31, 2019, was 1.78 Bcf, as compared to 1.84 Bcf during the same period in 2018[105] - The Auburn System gathered and delivered 24.9 Bcf gross (8.7 Bcf net to Epsilon's interest) during the first three months of 2019, representing approximately 84% of maximum throughput[106] Anadarko, NW Stack Trend – Oklahoma Anadarko's realized production price decreased 6.9% to $3.93 per Mcfe in Q1 2019, with total production (natural gas, oil, liquids) down 9% to 0.31 Bcfe - During the three months ended March 31, 2019, Epsilon's realized price for all Oklahoma production was $3.93 per Mcfe, a 6.9% decrease over the same period in 2018[107] - Total production for the three months ended March 31, 2019, including natural gas, oil, and other liquids, was 0.31 Bcfe, a 9% decrease over the same period in 2018[107] Non-GAAP Financial Measures-Adjusted EBITDA Adjusted EBITDA, a non-GAAP measure, was $4.393 million in Q1 2019, a decrease from $4.800 million in Q1 2018, excluding specific non-cash and financing items - Adjusted EBITDA is a non-GAAP measure that management believes provides useful information regarding its ability to service debt, fund capital expenditures, and compare operating performance[108][109] Adjusted EBITDA Reconciliation (Three Months Ended March 31, in thousands) | Item | 2019 | 2018 | | :------------------------------------------------ | :------------------ | :------------------ | | Net income | $1,374 | $2,159 | | Add Back: | | | | Net interest (income) expense | $(15) | $44 | | Income tax provision | $747 | $987 | | Depreciation, depletion, amortization, and accretion | $1,826 | $1,791 | | Stock based compensation expense | $134 | $83 | | Net change in unrealized (gain) loss on commodity contracts | $327 | $(264) | | Adjusted EBITDA | $4,393 | $4,800 | Results of Operations This section analyzes changes in Epsilon's Q1 2019 revenues, operating costs, DD&A, G&A, interest expense, commodity contract gains/losses, and miscellaneous income compared to Q1 2018 Net Operating Revenues Total revenues increased 2.2% to $7.94 million in Q1 2019, driven by higher upstream natural gas prices, while gathering system revenue decreased 12.7% due to lower throughput Revenue and Volume Statistics (Three Months Ended March 31, in thousands) | Metric | 2019 | 2018 | | :---------------------------- | :------------------ | :------------------ | | Natural gas revenue | $5,435 | $4,846 | | Natural gas volume (MMcf) | 1,823 | 1,900 | | Natural gas Avg. Price ($/Mcf) | $2.98 | $2.55 | | Oil and other liquids revenue | $73 | $156 | | Oil and other liquids volume (MBO) | 3.1 | 3.4 | | Oil and other liquids Avg. Price ($/Bbl) | $23.81 | $46.34 | | Gathering system revenue | $2,438 | $2,776 | | Total Revenues | $7,946 | $7,778 | - Upstream natural gas revenue for the three months ended March 31, 2019, increased by $0.6 million, or 12.1%, over the same period in 2018, due to higher natural gas prices, offset by slightly lower volumes[113] - Gathering system revenue decreased $0.4 million, or 12.7%, during the three months ended March 31, 2019, due to a 24% decrease in the volumes flowing through the system, partially offset by an increase in the gathering and compression rate charged[114] Operating Costs Total operating costs decreased 14% to $2.031 million in Q1 2019, with both upstream and gathering system costs declining due to lower production and throughput volumes Operating Costs (Three Months Ended March 31, in thousands) | Cost Category | 2019 | 2018 | | :------------------------------------ | :------------------ | :------------------ | | Lease operating costs | $1,718 | $1,930 | | Gathering system operating costs | $313 | $430 | | Total Operating Costs | $2,031 | $2,360 | - Upstream operating costs for the three months ended March 31, 2019, decreased $0.2 million, or 11.0%, mainly due to the decrease in volumes produced[119] - Gathering system costs for the three months ended March 31, 2019, decreased $0.1 million over the same period in 2018 because of the decrease in costs related to lower throughput volumes[119] Depletion, Depreciation, Amortization and Accretion ("DD&A") DD&A expense remained consistent at $1.826 million in Q1 2019, calculated using the units-of-production method, reflecting minor reserve report adjustments and stable production volumes DD&A Expense (Three Months Ended March 31, in thousands) | Item | 2019 | 2018 | | :------------------------------------------ | :------------------ | :------------------ | | Depletion, depreciation, amortization and accretion | $1,826 | $1,791 | - DD&A expense for the first three quarters is calculated based on the reserve report from the prior year, and remained fairly consistent due to minor adjustments to the reserve report and insignificant changes in production volumes[120][124] - Oil and natural gas and gathering system assets are depleted and depreciated using the units-of-production method[120] General and Administrative G&A expenses significantly increased by $0.7 million (82.4%) to $1.473 million in Q1 2019, primarily due to costs related to TSX delisting, NASDAQ listing, and US reporting General and Administrative Expenses (Three Months Ended March 31, in thousands) | Item | 2019 | 2018 | | :----------------------------- | :------------------ | :------------------ | | General and administrative | $1,473 | $808 | - G&A expenses increased by $0.7 million, or 82.4%, mainly due to additional costs incurred during the process of delisting from the TSX and listing on the NASDAQ, fulfilling US reporting requirements, and closing fees on the renewal of the revolving line of credit[126] Interest Expense Interest expense decreased to $28,000 in Q1 2019 from $45,000 in Q1 2018, mainly due to the revolving line of credit being paid off Interest Expense (Three Months Ended March 31, in thousands) | Item | 2019 | 2018 | | :--------------- | :------------------ | :------------------ | | Interest expense | $28 | $45 | - Interest expense decreased during the three months ended March 31, 2019, due to the paying off of the revolving line of credit in December 2018[128] Net Gain (Loss) on Commodity Contracts The company reported a net loss of $511,000 on derivative contracts in Q1 2019, a reversal from a $371,000 gain in Q1 2018, including $184,244 paid on settlements Gain (Loss) on Commodity Contracts (Three Months Ended March 31, in thousands) | Item | 2019 | 2018 | | :------------------------------------ | :------------------ | :------------------ | | Gain (loss) on derivative contracts | $(511) | $371 | - During the three months ended March 31, 2019, the company paid $0.18 million on the settlement of fixed price swap and basis swap derivative contracts, compared to receiving $0.11 million during the same period in 2018[129] Miscellaneous Income (Expense) Miscellaneous income increased to $43,000 in Q1 2019 from $1,000 in Q1 2018, primarily driven by interest income Miscellaneous Income (Three Months Ended March 31, in thousands) | Item | 2019 | 2018 | | :------------------- | :------------------ | :------------------ | | Miscellaneous income | $43 | $1 | - For both periods, miscellaneous income consisted primarily of interest income[131] Capital Resources and Liquidity Epsilon's liquidity relies on operational cash flow, cash on hand, and its credit facility, with an increased working capital surplus deemed sufficient for future needs Cash Flow Net cash from operating activities increased 62.6% to $3.9 million in Q1 2019, while cash used in investing rose to $1.5 million, and financing used $0.2 million for share repurchases - Net cash provided by operating activities increased by $1.5 million (62.6%) to $3.9 million during the three months ended March 31, 2019, mainly due to the collection of receivables[135] - The Corporation used $1.5 million of cash for investing activities during the three months ended March 31, 2019, primarily on leasehold costs in Oklahoma and Pennsylvania, and the acquisition of unproved properties in Oklahoma[136] - The $0.2 million of cash used for financing activity during the three months ended March 31, 2019, was related to the repurchase of common shares[137] - At March 31, 2019, working capital surplus was $15.0 million, an increase of $3.8 million over the $8.5 million surplus at March 31, 2018, due to cash continually generated by operations[134] Credit Agreement The revolving credit facility's maturity was extended to March 2022 with a $23 million borrowing base, and the company maintained compliance with all financial covenants as of March 31, 2019 - The credit agreement was amended effective January 7, 2019, to extend the maturity date to March 1, 2022, with a current effective borrowing base of $23 million[138] - The company was in compliance with the financial covenants (interest coverage ratio > 3, leverage ratio < 3.5, current ratio > 1) of the agreement as of March 31, 2019, and December 31, 2018[139][141][142] - Available borrowing capacity under the credit agreement is $23 million as of May 10, 2019[140] Derivative Transactions Epsilon employs hedging, including fixed price and basis swap contracts, to mitigate natural gas price volatility and stabilize cash flows, while acknowledging limitations on price upside - Epsilon has entered into hedging arrangements to reduce the impact of natural gas price volatility on operations and mitigate potential effects of changing prices on operating cash flows[144] Outstanding Natural Gas Commodity Swap Contracts (as of March 31, 2019) | Derivative Type | Volume (Mmbtu) | Weighted Price ($/MMbtu) | Basis Differential ($/MMbtu) | Fair Value of Liability (March 31, 2019) ($) | | :---------------- | :------------- | :----------------------- | :--------------------------- | :--------------------------------------- | | 2019 | | | | | | Fixed price swap | 4,287,500 | $2.80 | $0 | $(13,020) | | Basis swap | 4,287,500 | $0 | $(0.49) | $(479,062) | | 2020 | | | | | | Fixed price swap | 3,111,000 | $2.73 | $0 | $(16,690) | | Basis swap | 3,111,000 | $0 | $(0.47) | $(114,761) | | Total | 14,797,000 | | | $(623,533) | Contractual Obligations As of March 31, 2019, Epsilon's total contractual obligations were $15.345 million, mainly long-term asset retirement obligations and current derivative liabilities, with cash flow and credit expected to cover future liquidity Contractual Obligations (as of March 31, 2019, in thousands) | Obligation Type | Total ($) | Less than 1 Year ($) | 1 – 3 Years ($) | Greater than 3 Years ($) | | :-------------------------------- | :------------ | :--------------- | :---------- | :------------------- | | Derivative liabilities | $1,212 | $1,109 | $103 | $0 | | Asset retirement obligation, undiscounted | $13,935 | $0 | $0 | $13,935 | | Capital expenditure commitments | $131 | $131 | $0 | $0 | | Operating leases | $67 | $61 | $7 | $0 | | Total future commitments | $15,345 | $1,301 | $110 | $13,935 | - Based on current natural gas prices and anticipated production levels, Epsilon believes that estimated net cash generated from operations, together with cash on hand and available credit, will be adequate to meet future liquidity needs for the next 12 months and beyond[147] Off-Balance Sheet Arrangements As of March 31, 2019, the Corporation had no off-balance sheet arrangements - As of March 31, 2019, the Corporation had no off-balance sheet arrangements[148] Foreign Currency Exchange Rate Risk Epsilon faces foreign currency exchange rate risk, mainly CAD/USD, managed by holding cash in both currencies without using foreign currency derivatives - Epsilon is exposed to risks arising from fluctuations in foreign currency exchange rates, primarily between Canadian and U.S. dollars[149] - The company does not utilize any foreign currency based derivatives and manages this risk by retaining cash balances in both U.S. and Canadian dollars[149][150] [ITEM 3. QUANTIT