Epsilon Energy .(EPSN) - 2025 Q2 - Quarterly Results

Membership Interest Purchase Agreement Overview This agreement outlines the sale of PEAK EXPLORATION & PRODUCTION, LLC's membership interests to EPSILON ENERGY USA, INC. Parties to the Agreement This section identifies the key parties to the agreement, including Sellers, Purchaser, and their respective parent entities - The agreement details the sale of all issued and outstanding interests of PEAK EXPLORATION & PRODUCTION, LLC[14] Key Parties in the Transaction | Role | Entity Name | | :--- | :--- | | Sellers | Various entities and individuals listed in Annex I | | Company Being Sold | PEAK EXPLORATION & PRODUCTION, LLC | | Purchaser | EPSILON ENERGY USA, INC. | | Purchaser Parent | EPSILON ENERGY LTD. | | Sellers' Representative | YORKTOWN ENERGY PARTNERS XI, L.P. | ARTICLE 1: DEFINITIONS AND INTERPRETATION This article establishes the definitions for capitalized terms and provides rules for agreement interpretation Section 1.1: Defined Terms This section specifies that capitalized terms are primarily defined in Appendix A and apply consistently throughout the document - Capitalized terms used in the agreement are primarily defined in Appendix A[17] Section 1.2: References and Rules of Construction This section provides guidelines for interpreting the agreement, covering references, common terms, and accounting principles - All references to Exhibits, Annexes, Schedules, and Appendices are incorporated into the agreement[19] - The term "made available to Purchaser" means documents were posted to the Data Room at least two business days before the Execution Date[19] ARTICLE 2: PURCHASE AND SALE This article details the core transaction of selling Company Interests and establishes the financial effective time Section 2.1: Purchase and Sale This section outlines the core transaction where Sellers transfer Company Interests to Purchaser free and clear of encumbrances - Sellers agree to sell the Company Interests to the Purchaser, and the Purchaser agrees to buy them at Closing[21] Section 2.2: Effective Time This section establishes the financial effective time for asset transfer as 12:01 a.m., Mountain Time, on January 1, 2025 - The financial effective time of the transaction is set for 12:01 a.m., Mountain Time, on January 1, 2025[22] ARTICLE 3: PURCHASE PRICE This article defines the purchase price, its allocation for tax purposes, and various adjustments Section 3.1: Purchase Price The purchase price is 5,800,000 common shares of Purchaser Parent, subject to proportionate adjustment Unadjusted Purchase Price | Consideration Type | Amount | | :--- | :--- | | Purchaser Parent Common Stock | 5,800,000 shares | - The number of shares is subject to proportionate adjustment for events like stock splits, dividends, or mergers involving Purchaser Parent stock before closing[24][25] Section 3.2: Allocation of Purchase Price This section details the purchase price allocation for tax purposes, based on the 60-day volume-weighted average price (VWAP) of Purchaser Parent stock - The purchase price will be allocated among the assets according to the methodologies in Schedule 3.2 and IRS Code Section 1060[26] - For tax purposes, the Purchaser Parent Common Stock will be valued using the 60-day volume-weighted average price (VWAP) prior to the Closing Date[26] Section 3.3: Adjustments to Purchase Price This section outlines upward and downward adjustments to the purchase price, converted into Purchaser Parent shares - The Unadjusted Purchase Price will be adjusted upward for the appraised value of the Durango Building[29] - Downward adjustments include reductions for title/environmental defects, suspense funds, leakage, company transaction expenses exceeding the Fee Cap, and the value of Purchaser's non-oil and gas real estate in Pennsylvania[29] - All dollar-based adjustments will be converted to an equivalent number of Purchaser Parent shares using the 60-day VWAP prior to closing[28] Section 3.4: Allocated Values This section specifies "Allocated Values" for assets, used for defect thresholds but not for purchase price adjustments - Allocated Values for assets are listed in Schedule 3.4 and are used to determine if the Individual Defect Threshold and Aggregate Defect Deductible are met[30][31] - Sellers do not represent or warrant the accuracy of the Allocated Values[31] ARTICLE 4: TITLE AND ENVIRONMENTAL MATTERS This article outlines the processes for identifying, notifying, and adjusting for title and environmental defects Section 4.1: Sellers' and the Company Group's Title This section disclaims Sellers' title warranties, limiting Purchaser's sole remedy to the adjustment process or special warranty - Sellers expressly disclaim any representation or warranty regarding title to the assets, except for the special warranty in Section 6.25[32] - Purchaser's sole remedy for title defects is the adjustment process defined in this Article 4 before the Claim Date, and the special warranty thereafter[32] Section 4.2: Notice of Title Defects; Title Defect Adjustments This section details the procedure for Purchaser to claim Title Defects, including notice, cure rights, and adjustment - Purchaser must deliver a Title Defect Notice to Sellers' Representative no later than 5:00 p.m. Mountain Time, 45 days after the Execution Date (the "Claim Date")[35] - Sellers have a "Cure Period" ending two business days before the Closing Date to attempt to cure any asserted Title Defects at their own expense[36] - The "Title Defect Amount" is calculated based on specific methodologies, such as the cost to remove a lien or a formula based on the reduction in Net Revenue Interest or Net Mineral Acres[42][43] Section 4.3: Title Benefits This section allows Sellers to assert Title Benefits, which offset downward purchase price adjustments from Title Defects - Sellers can assert Title Benefits by delivering a Title Benefit Notice on or before the Claim Date[44] - Title Benefit Amounts are used only as an offset against Title Defect Amounts and do not result in an upward adjustment to the Unadjusted Purchase Price[46] Section 4.4: Notice of Environmental Defects; Environmental Defect Adjustments This section outlines the process for addressing Environmental Defects, including notice, cure rights, and Purchaser's disclaimers - Purchaser must deliver an Environmental Defect Notice by the Claim Date, detailing the alleged defect, affected assets, and a calculation of the Remediation Amount[50] - The remedy for an uncured Environmental Defect is a reduction in the Unadjusted Purchase Price by the Remediation Amount, subject to applicable thresholds[56] - Purchaser acknowledges the assets have been used for oil and gas operations and may contain hazardous substances like NORM and asbestos, waiving claims except as provided in this article[59] Section 4.5: Limitations on Applicability This section establishes financial thresholds for Title and Environmental Defect claims, including individual and aggregate deductibles Defect Claim Thresholds | Threshold Type | Amount | Description | | :--- | :--- | :--- | | Individual Defect Threshold | $75,000 | No adjustment for any single Title or Environmental Defect below this amount | | Aggregate Defect Deductible | $1,000,000 | No adjustments unless the total of all qualifying defects exceeds this amount. Purchaser is then entitled to adjustments only for the amount in excess of the deductible | Section 4.6: Title and Environmental Disputes This section provides an exclusive dispute resolution mechanism for title and environmental disagreements via a neutral Consultant - Disputes over title or environmental matters that cannot be resolved by the parties before Closing will be submitted to a neutral Consultant for a final and binding resolution[64] - The Consultant will be an experienced attorney for title disputes or an environmental attorney for environmental disputes[66] - The dispute resolution process is not intended to delay the Closing; adjustments for disputed matters will be made post-Closing based on the Consultant's decision[72] Section 4.7: Casualty or Condemnation Loss This section addresses Casualty Losses, requiring Purchaser to close without price reduction and receive related insurance proceeds and condemnation awards - If a Casualty Loss occurs before Closing, the Purchaser must still close the transaction with no reduction to the purchase price[73] - Upon Closing, Purchaser becomes entitled to all insurance proceeds and condemnation awards related to the Casualty Loss[73] ARTICLE 5: REPRESENTATIONS AND WARRANTIES OF SELLERS This article contains the Sellers' fundamental representations and warranties regarding their legal standing and the transaction Sections 5.2-5.5: Existence, Power, Authorization, and Conflicts These sections contain Sellers' representations that they are duly formed and validly existing entities, authorized, and the transaction has no conflicts - Each Seller warrants it is a duly formed and validly existing entity[76] - Sellers confirm they have the necessary power and authority to execute the agreement and that it is a legally enforceable obligation[77][78] - The execution of the agreement will not conflict with Sellers' organizational documents, material contracts, or laws, except as disclosed in Schedule 5.5[79] Section 5.6: Capitalization Each Seller represents ownership of Company Interests free of encumbrances, transferring good and valid title to Purchaser at Closing - Each Seller warrants ownership of the Company Interests as detailed in Schedule 5.6, free of encumbrances[80] - At Closing, Purchaser will receive good and valid title to the Company Interests[81] Sections 5.7-5.10: Brokers' Fees, Litigation, Bankruptcy, and Credit Support These sections provide Sellers' warranties regarding brokerage fees, absence of litigation or bankruptcy, and credit support - Sellers are responsible for their own brokerage or finder's fees[82] - There are no pending or threatened bankruptcy proceedings against any Seller[83] - Schedule 5.10 provides a complete list of all credit support (bonds, letters of credit, etc.) posted by Sellers or their Affiliates for the Company Group[84] ARTICLE 6: REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY GROUP AND THE ASSETS This article details the Company Group's representations and warranties concerning its operations, assets, and financial condition Sections 6.2-6.5: Company Existence, Power, Authorization, and Conflicts The Company represents its validly existing LLC in good standing under Delaware law, power, proper authorization, and absence of conflicts with its obligations - The Company is a validly existing LLC in good standing under Delaware law[86] - The agreement is a valid and binding obligation of the Company, duly authorized by all necessary company action[88] Section 6.6: Capitalization This section details the Company's capital structure, confirming Sellers own all issued and outstanding Interests of the Company Company Interests as of Execution Date | Interest Type | Amount | | :--- | :--- | | Common Units | 2,325,510 | | Preferred Units | 958,864 | | Tier I Profits Units | 0 outstanding | | Tier II Profits Units | 0 outstanding | - Sellers own all issued and outstanding Interests of the Company[91] - Except as listed in Schedule 6.6(c), there are no outstanding options, warrants, or other rights to acquire Company Interests[92] Section 6.9: Taxes and Assessments The Company represents all material Tax Returns are filed and paid, with no pending or threatened tax audits or deficiencies - All material Tax Returns for the Company Group have been timely filed and are accurate, and all material Taxes have been paid[98] - There are no pending or threatened tax audits or deficiencies against the Company Group, except as disclosed in Schedule 6.9[101][102] - The Company has always been classified as a partnership for federal income tax purposes, and its subsidiaries as disregarded entities[106] Section 6.12: Material Contracts This section defines and lists the Company's Material Contracts, warranting their validity and absence of default - Schedule 6.12 lists all Material Contracts, which include those with payments or revenues over $100,000/year, hydrocarbon sales agreements, and joint operating agreements[117][118] - The Company warrants that there are no material defaults under any Material Contract by the Company Group or, to its knowledge, any other party[120] Section 6.17: Environmental Matters The Company represents material compliance with Environmental Laws and absence of material Environmental Claims - The Company Group and its assets are in compliance with Environmental Laws in all material respects[125] - There are no pending or, to the Company's knowledge, threatened material Environmental Claims against the Company Group or its assets[125] Section 6.28: Employment Matters This section provides representations regarding Company employees, labor law compliance, and absence of labor agreements - Schedule 6.28(a)(i) lists all Employees, and Schedule 6.28(a)(ii) lists all Contingent Workers[138] - No Employees are represented by a labor union, and there are no labor agreements in place[139][140] - The Company Group is in material compliance with all applicable labor and employment laws[141] Section 6.39: Financial Statements The Company represents its financial statements are true, complete, prepared in accordance with GAAP and fairly present the Company Group's financial condition - Schedule 6.39 contains the Company Group's audited annual financial statements for 2022, 2023, and 2024, and unaudited interim statements as of June 30, 2025[169] - The financial statements were prepared in accordance with GAAP and fairly present the Company Group's financial condition[169] ARTICLE 7: REPRESENTATIONS AND WARRANTIES OF PURCHASER This article outlines the Purchaser's representations and warranties regarding its legal standing, financial capacity, and independent evaluation Sections 7.2-7.5: Existence, Power, Authorization, and Conflicts Purchaser and Purchaser Parent represent they are validly existing corporations in good standing, power, authorization, and absence of conflicts - Purchaser and Purchaser Parent are validly existing corporations in good standing[172][173] - The agreement has been duly authorized and is a valid and binding obligation of the Purchaser and Purchaser Parent[175] Section 7.8: Independent Evaluation Purchaser acknowledges independent due diligence and relies solely on express representations in Articles 5 and 6 - Purchaser acknowledges it is a sophisticated party capable of evaluating the assets and has relied solely on its own independent due diligence[180][181][182] - Purchaser explicitly disclaims reliance on any representation or statement other than those expressly contained in Articles 5 and 6 of the agreement[182] Section 7.12: Capitalization Purchaser Parent represents its capital structure and warrants that shares issued as purchase price will be validly issued, fully paid, and nonassessable Purchaser Parent Capitalization | Security Type | Amount Issued & Outstanding | | :--- | :--- | | Common Shares | 22,058,574 | | Preferred Shares | 0 | - The shares issued to Sellers as part of the purchase price will be validly issued, fully paid, and nonassessable[191] Section 7.14: SEC Documents; Financial Statements; No Liabilities Purchaser Parent warrants timely filed all required SEC documents since December 31, 2024, compliance, and GAAP-compliant financial statements fairly presenting its financial condition - Purchaser Parent has timely filed all required SEC documents since December 31, 2024, which complied with applicable regulations[200] - The Purchaser Parent's financial statements were prepared according to GAAP and fairly present its financial condition[200] ARTICLE 8: COVENANTS OF THE PARTIES This article details the ongoing obligations and restrictions on the parties between signing and closing Section 8.1: Access This section grants Purchaser reasonable access to assets and records for due diligence, prohibits invasive environmental testing without consent, and requires Purchaser indemnification - Sellers will provide Purchaser with reasonable access to assets and records for due diligence before closing[206] - Invasive environmental testing (e.g., soil or water sampling) is not permitted without Sellers' consent[207] - Purchaser must indemnify and hold harmless the Sellers Group from any damages arising from its due diligence activities[216] Section 8.2: Operation of Business This section requires the Company Group to operate in the Ordinary Course of Business and restricts certain actions without consent - From signing to closing, the Company must conduct its business in the Ordinary Course of Business[217] - The Company is restricted from taking certain actions without Purchaser's consent, including: proposing new capital expenditures over $50,000, entering into new material contracts, selling assets, or issuing any new interests[218][219] Section 8.6: R&W Insurance Policy This section confirms Purchaser's R&W Insurance Policy, requiring a waiver of subrogation and prohibiting materially adverse amendments - Purchaser has procured a conditional binder for an R&W Insurance Policy, attached as Exhibit E[227] - The R&W Insurance Policy must contain a waiver of subrogation against the Sellers Group, except in cases of Fraud[228] - Purchaser covenants not to amend, modify, or terminate the policy in a manner that is materially adverse to the Sellers Group[228][229] Section 8.7: Directors and Officers This section ensures All existing rights to indemnification and exculpation for D&O for at least six years post-closing and requires a six-year "D&O Tail Policy" - All existing rights to indemnification and exculpation for the Company Group's directors and officers will survive the Closing for at least six years[231] - Prior to Closing, the Company Group must obtain and pay for a six-year "D&O Tail Policy" to cover claims arising from pre-closing events[235] Section 8.13: Board Representation at Purchaser Parent This section grants Sellers the right to appoint two designees to the Purchaser Parent's Board of Directors at Closing - At Closing, Sellers will appoint two designees to the Purchaser Parent's Board of Directors[249] - These designees will be nominated for re-election at the 2026 annual stockholders' meeting[250] ARTICLE 9: CONDITIONS TO CLOSING This article specifies the conditions that must be satisfied or waived by each party for the transaction to close Section 9.1: Sellers' Conditions to Closing This section lists Sellers' closing conditions, including Purchaser's representations and warranties must be true and correct, covenants, and 20% of the Unadjusted Purchase Price impairment thresholds - Purchaser's representations and warranties must be true and correct[260] - Purchaser must have performed its covenants in all material respects[260] - The total value of impairments (Title/Environmental Defects and Casualty Losses) must not exceed 20% of the Unadjusted Purchase Price[261] - Purchaser Parent must have received shareholder consent for the transaction[261] Section 9.2: Purchaser's Conditions to Closing This section lists Purchaser's closing conditions, mirroring Sellers' regarding Sellers' and Company's representations and warranties must be true and correct, covenants, and 20% of the Unadjusted Purchase Price impairment thresholds - Sellers' and Company's representations and warranties must be true and correct[263] - Sellers must have performed their covenants in all material respects[263] - The total value of impairments (Title/Environmental Defects and Casualty Losses) must not exceed 20% of the Unadjusted Purchase Price[263] ARTICLE 10: CLOSING This article outlines the procedures, deliverables, and settlement process for the transaction's closing Section 10.1: Time and Place of Closing This section sets the time and place for the electronic closing of the transaction, contingent on condition fulfillment - The Closing will take place on the later of October 27, 2025, or two business days after all conditions in Article 9 are satisfied or waived[267] Section 10.2: Obligations of Sellers' Representative at Closing This section lists the documents and actions Sellers' Representative must deliver at Closing, including agreements and certificates - Deliver executed Assignment Agreements and Registration Rights Agreement[267][268] - Provide a certificate confirming that Sellers' representations are true and covenants have been performed[267] - Deliver written resignations of officers and directors listed in Schedule 10.2(e)[267] Section 10.3: Obligations of Purchaser at Closing This section lists Purchaser's obligations at Closing, primarily Deliver the Adjusted Purchase Price via issuance of the Purchaser Parent Common Stock to Sellers and confirming conditions - Deliver the Adjusted Purchase Price via issuance of the Purchaser Parent Common Stock to Sellers[269] - Provide evidence that the Company's Existing Secured Credit Facility has been paid off[269] - Deliver a certificate confirming that Purchaser's representations are true and covenants have been performed[269] Section 10.4: Settlement Statement This section describes the process for finalizing purchase price adjustments via a Settlement Statement and dispute resolution - Sellers' Representative will prepare a draft Settlement Statement calculating the Adjusted Purchase Price five business days before Closing[272] - If there are disputes over the adjustments, they will be submitted to an Independent Accountant for a binding resolution[273] ARTICLE 11: TERMINATION This article defines the conditions under which the agreement can be terminated and the consequences of such termination Section 11.1: Termination This section outlines conditions for agreement termination, including mutual written consent of the parties, legal prohibition, material, uncured breach by the other party, or Outside Date - The agreement can be terminated by mutual written consent of the parties[278] - Either party can terminate if there is a material, uncured breach by the other party[278] - Any party can terminate if the Closing does not occur by the Outside Date, which is 180 days after the Execution Date[278] Section 11.2: Effect of Termination This section details termination consequences, specifying exclusive remedies for breach and a Termination Fee of $750,000 for lack of consent - Upon termination, the agreement becomes void, except for certain specified surviving sections[280] - In the event of a failure to close due to a breach, the non-breaching party's exclusive remedies are to either seek specific performance or terminate the agreement[281][282] - If Sellers' Representative terminates because Purchaser Parent fails to get shareholder approval, Sellers' sole remedy is to receive a Termination Fee of $750,000[283][491] ARTICLE 12: INDEMNIFICATION This article establishes the post-closing indemnification obligations and procedures for claims between the parties Section 12.1: Indemnification This section establishes post-closing indemnification, with the R&W Insurance Policy as the primary remedy, except for Fraud - Purchaser indemnifies Sellers for breaches of Purchaser's covenants and warranties[287] - Sellers indemnify Purchaser for breaches of Sellers' covenants[288] - This article provides the sole and exclusive remedy for the parties post-closing, except for claims of Fraud and rights under the R&W Insurance Policy[288] Section 12.2: Indemnification Actions This section sets forth procedures for making and resolving indemnification claims, including Claim Notice and defense control - An indemnification claim is initiated by the Indemnified Person sending a Claim Notice to the Indemnifying Person[292] - For third-party claims, the Indemnifying Person has the right to control the defense if it admits its obligation to indemnify[294] Section 12.3: Limitations on Actions This section establishes survival periods for representations and covenants, limiting Purchaser's recourse post-closing - Sellers' and Company's representations and warranties terminate at the Closing Date; Purchaser's recourse is through the R&W Insurance Policy[299] - Purchaser's representations and warranties survive for twelve months following the Closing Date[299] - Purchaser explicitly waives all rights and claims against Sellers relating to the subject matter of the agreement, except for Fraud and indemnification for covenant breaches[301] ARTICLE 13: TAX MATTERS This article addresses tax filing responsibilities and the agreed-upon tax treatment of the transaction Section 13.1: Tax Filings This section designates Sellers' Representative will prepare all Pass-Through Tax Returns for pre-closing periods that are filed after Closing and allocates Deal-Generated Deductions - Sellers' Representative will prepare all Pass-Through Tax Returns for pre-closing periods that are filed after Closing[313] - Deal-Generated Deductions are to be allocated to the Pre-Closing Tax Period to the extent permitted by law[313] Section 13.5: Tax Treatment The parties agree on the U.S. federal income tax treatment, consistent with IRS Revenue Ruling 99-6, Situation 2 - The transaction will be treated in a manner consistent with IRS Revenue Ruling 99-6, Situation 2[317] - For Sellers, the transaction is a taxable sale of their Company Interests[317] - For Purchaser, the transaction is a purchase of all of the Company's Assets[317] ARTICLE 14: MISCELLANEOUS This article covers general legal provisions, including governing law, dispute resolution, and limitations on damages Section 14.4: Governing Law; Jurisdiction This section establishes Texas law, grants exclusive jurisdiction to Harris County, Texas courts, and includes a trial by jury waiver - The agreement is governed by the laws of the State of Texas[325] - Exclusive jurisdiction for disputes is granted to the federal or state courts in Harris County, Texas[326] - All parties waive their right to a trial by jury for any disputes related to the agreement[328] Section 14.11: Limitation on Damages This section limits damages, excluding consequential, special, indirect, punitive, or exemplary damages, with waivers - Parties are not entitled to consequential, special, indirect, punitive, or exemplary damages from each other in connection with this agreement[336] Section 14.16: Specific Performance This section grants specific performance rights, but Sellers explicitly waive any right to specific performance to compel the Purchaser to close the transaction - Parties are entitled to seek specific performance and injunctive relief for breaches of the agreement, as monetary damages are considered inadequate[341] - Sellers explicitly waive any right to specific performance to compel the Purchaser to close the transaction[341] Section 14.20: Sellers' Representative This section appoints Yorktown Energy Partners XI, L.P. as Sellers' Representative with full authority to act on behalf of all Sellers, which is irrevocable - Yorktown Energy Partners XI, L.P. is appointed as the Sellers' Representative with full authority to act on behalf of all Sellers[347][348] - The Representative's authority is irrevocable and includes negotiating claims, executing amendments, and giving/receiving notices[348][351] - Purchaser is entitled to rely on all actions taken by the Sellers' Representative as binding on all Sellers[350] Appendices, Annexes, Exhibits, and Schedules This section describes the supplementary documents providing detailed information and forms for the agreement Ancillary Documents The agreement is supplemented by appendices, annexes, exhibits, and schedules providing detailed information and forms - Appendix A contains the definitions for capitalized terms used throughout the agreement[7] - Annex I provides a complete schedule of all entities and individuals defined as "Sellers"[7] - Exhibits provide forms for critical legal documents, including the Assignment Agreement (Exhibit B), Lock-Up Agreement (Exhibit C), and Registration Rights Agreement (Exhibit D)[9] - Numerous Schedules provide detailed disclosures qualifying the representations and warranties made in Articles 5, 6, and 7[9][10]